The Right to Rise

Jeb Bush published an interesting op-ed in the Wall Street Journal last week, noting Congressman Paul Ryan's recent characterization of economic freedom as "the right to rise."  As Bush said, the right to rise entails the right to take risks.  Government needs to let people take risks, to let them suffer the consequences of bad decisions and, importantly, to let them enjoy the benefits of good ones.  Yet, government too frequently does the opposite. In the interest of protecting us from bad investments, losing a job, poor health--nearly anything negative that might befall us--it seeks to take away the rewards of work and investment, or the return on risks that pay off.

But when it comes to economic freedom, we are less forgiving of the cycles of growth and loss, of trial and error, and of failure and success that are part of the realities of the marketplace and life itself.

Increasingly, we have let our elected officials abridge our own economic freedoms through the annual passage of thousands of laws and their associated regulations. We see human tragedy and we demand a regulation to prevent it. We see a criminal fraud and we demand more laws. We see an industry dying and we demand it be saved. Each time, we demand "Do something . . . anything."

Bush rightly condemns over-regulation, but he does not go far enough, in my view.

AEI on the Moral Defense of Free Enterprise

Arthur Brooks, president of the American Enterprise Institute, today gave a speech to the Washington Lawyers' Chapter of the Federalist Society, on the moral justification for the free enterprise system. His bio is here.  He is a great speaker and gave a great defense for free enterprise, pointing out that convincing people of the virtues of "efficiency" and "liberty" are not sufficient to win their hearts -- they must be convinced that free enterprise is right and fair.  Free enterprise, of course, does more, and has done more, to lift millions out of poverty than any government program or statist economic regime, and because it most benefits the poor it is the just economic system that everyone should embrace and support.  He also points out, correctly in my view, that obtaining support for such a fundamental change takes decades, not a single election.  I have a feeling we are going to be hearing a lot more from Mr. Brooks in the years ahead.  I would be thrilled if he played a major role in economic policy in the next presidential administration.

Government Should Not Foster Unproductive Trade

I have pointed out before that transactions in a fair market benefit both buyer and seller, unless one is stealing from the other, and therefore create wealth.  An "unfair market" is one in which a buyer or a seller has artificially precluded competitors, and thereby can command a lower than fair market price (if it is the buyer) or a higher one (if it is the seller).  A monopoly or a labor union are examples of sellers who artificially preclude competitors. A monopsony is a buyer who precludes competitive purchasers.  Transactions with these types of traders do not benefit their trading partners, at least as much as they would be benefitted in a fair market, because the monopolist or monopsonist is able to set a price that benefits itself more.  Their trading partners still benefit to some degree, or else they would not trade.  Because these artificial restraints on trade do not promote efficient allocation of wealth or wealth creation, they have been viewed as moral wrongs and outlawed since the Sherman Act was passed in 1890.

Other transactions similarly take advantage of one side of the bargain artificially to enrich the other, and therefore also do not create wealth.  Selling drugs to an addict, for example, destroys the well-being of the purchaser and deprives him of wealth that could be put to productive use; this is not offset by the dealer's profit.  Casinos also take advantage of addicts, but even when they don't, they do not create wealth.  Taking money to play a game of chance, in which the odds are always in favor of the house, makes the casino owner rich, but paying it does not increase the well-being of the player, unless the player values the entertainment of playing the game more highly than what he loses by playing.  Many people can't stop playing, however, or hope to recover losses with "just one more game," or truly are addicted to the thrill presented by the risk, and pay much more than they receive in entertainment.  They are being robbed, but with their consent.

From a moral perspective, of course, recreational drugs and gambling are harmful to those who partake of them and to society in general, and therefore are rightly prohibited.  But they also destroy wealth, and at a minimum government, for that reason, should not promote them.  States and Indian nations that open or permit casinos for purposes of "economic revitalization" therefore have it completely backward.  Casinos do not revitalize anything.  By taking wealth from some (gamblers) and giving it to others (the casino owners), without making the gamblers economically better off, casinos engage in a form a wealth redistribution, making the poor poorer and the rich richer, but destroying wealth in the process.

Are Death Taxes on the "Rich" Bad for the "Poor"?

Professor Steven Landsburg of the University of Rochester recently published an op-ed in the Wall Street Journal asserting that the estate tax actually hurts the poor.  (How the Death Tax Hurts the Poor, Oct. 29, 2011).  If he is right, it would be a great reason to do away with the estate tax, since the only reason that tax exists is to divest the well-to-do of the right to pass their life savings on to their children, ostensibly for the benefit of the less well-to-do.  It does not exist to raise revenue, as every year it raises a minuscule sum.  See Congressional Budget Office, Economic and Budget Issue Brief, "Federal Estate and Gift Taxes" (Dec. 18, 2009) ("Federal transfer taxes have historically made up a relatively small share of total federal revenues—accounting for 1 percent to 2 percent of total revenues in most of the past 60 years.").  If it actually hurts the poor,* there is no reason it should exist.


Professor Landsburg's theory is that the death tax hurts the poor by encouraging "the rich" to spend their money instead of saving it, since any savings will only be taxed at punitive rates upon death, and by spending their wealth the rich deprive others of material goods:

The death tax sends a powerful message to rich people: "You can't leave everything to your heirs, so spend now, before it's too late. Burn more fuel. Demand more timber for your mansions, more steel for your private planes, and more fiberglass for your yachts.'' 

Then all those resources—the fuel and timber, the steel and fiberglass—become unavailable to build factories, so the rest of us get worse jobs at lower wages. Those resources are unavailable to build farm equipment, so we all pay higher food prices. They're unavailable to build roads and schools and hospitals. 

I don't begrudge anyone the fruits of his labor. But the death tax encourages people to pick extra fruit, leaving the trees a little barer for the rest of us.

Putting aside that Professor Landsburg apparently does not know what airplanes are made of (lots of aluminum, titanium and/or carbon fiber; relatively little steel), he seems to me to be completely right in his thesis, but completely wrong in his theory. In other words, Professor Landsburg is right that the death tax hurts the poor; but not for the reasons he puts forth.  

Noonan on Ryan the Thinker

Rep. Paul Ryan of Wisconsin

The more I read about Paul Ryan the more I like him.  Here is an interesting article by Peggy Noonan in the Wall Street Journal drawing a contrast between President Obama, now abandoning "hope" as a campaign message and embracing fear and division, and Ryan, who challenges the President's new tack but also challenges Republicans who support "corporate welfare and crony capitalism."  Ryan says:

Rather than raise taxes on individuals, we should "lower the amount of government spending the wealthy now receive." The "true sources of inequity in this country," he continued, are "corporate welfare that enriches the powerful, and empty promises that betray the powerless." The real class warfare that threatens us is "a class of bureaucrats and connected crony capitalists trying to rise above the rest of us, call the shots, rig the rules, and preserve their place atop society."

In this, Ryan has much in common with Occupy Wall Street, but his ire is properly directed at the government apparatchiks and their cronies who steal from "the rest of us," instead of the "1 percent" of high earners who make money for the rest of us.  Noonan summarizes:

If more Republicans thought—and spoke—like this, the party would flourish. People would be less fearful for the future. And Mr. Obama wouldn't be seeing his numbers go up.

Burdens on Trade Destroy Wealth, Too

We mentioned earlier that involuntary transactions—such as taxes and stealing—destroy wealth.  By the same token, anything that makes a trade more costly or difficult also destroys wealth.  I gave an example of hiring my neighbor's son to mow my lawn as increasing my wealth, because I'm better off, in my estimation, paying what he charges than doing it myself.  But let's say the government feels the need to get involved in our little transaction. The government might say I need to pay Social Security and Medicare taxes and fill out forms to do so.  It might say I have to withhold income taxes.  It might say I need to pay the boy's health insurance, and accident insurance, maybe life insurance, too.  It might say to him that he can't use his gas mower because it makes too much pollution, so he has to buy a new electric one.  And it might say he can't dispose of the clippings in the garbage can because that overburdens the landfill, but he has to mulch the clippings, which takes longer to do.

All of these rules might, in the abstract, have benefits, but they all also have costs.  To cover the taxes and insurance, the cost of the electric mower, and the extra time it takes to mow, my neighbor's son might have to charge $25 to net the $15 he was getting without any government regulation. And at $25, plus the taxes and insurance I have to pay, plus a bunch of paperwork I have to keep track of, I may say, "Gee, I can do it myself, so no thanks." I'm worse off because I have to spend time mowing when I could have had a mown lawn for $15; he's worse off because he loses the job and gets nothing; so we are both worse off, and wealth is destroyed.  (Oh, and in the meantime, he has bought the new mower, but he no longer has the business he needs to pay for it.)

So burdens on trade destroy wealth just as much as as involuntary transactions do.

Redistribution Theory Meets Redistribution Practice

Occupy Wall Street protesters are apparently upset that some are stealing their money and stuff, including expensive MacBook computers. Their ire is ironic. After all, what is redistribution, something they apparently demand for their benefit, if not taking from those that have and giving to those that don't? It's great in theory, as long as you are the one getting.  But as soon as you are the one losing, it is just stealing.

It seems a few of their own necks have been placed in the guillotine already.

No Such Thing as "The Rich"

President Obama is fond of proposing that new government programs or give-aways be paid for by "taxing the rich."  Soaking "the rich" has been a popular suggestion for a long time, because those who suggest it know that everyone will suppose that "the rich" are someone else--not them, certainly.  "Let someone else," they say, "someone who has the money, pay for my college education.  They can afford it, so why not?"

I have pointed out one "why not" below, which is that making someone else pay for your goods and services makes the nation as whole poorer -- a lot poorer.  But the "tax the rich" mantra has more to do with attacking a class of persons than with finding funding for public goods--even assuming paying for private wants, like education, can be justified as a public good.  This increasing hostility toward a class of persons called "the rich" is frightening, but it is also just mistaken.

Leftists talk about the rich as if they were evil.  But who are they talking about, and what did they do to deserve our opprobrium?  When it comes down to it, there is no one who fits the Left's description of "the rich," except "the rest of us" the Left claims to be defending.

Think about it:  By using the phrase "the rich," the Left is talking about a whole group of people -- a class -- who have attained wealth by apparently illegitimate means, that is, by oppressing other people.  To Leftists, "the rich" got that way through inappropriate use of power, using law, social structures, class discrimination and outright force to deprive others of their wealth.  Indeed, Leftists cannot conceive of how anyone can grow wealthy except by forcing wealth out of other people's hands, as they do not understand (or they choose to ignore) that one can grow wealthy by work, invention, investment and trade, which do not take away wealth from anyone but create wealth, and make others wealthier, too.

Now, there are economic systems in the world built on illegitimate power structures that Leftists, or anyone for that matter, might properly condemn.  Certainly it is wrong when a small group of persons who run the government apparatus accord to themselves the land, natural resources and productive power of a nation, paying themselves huge profits from exploiting those resources and the work of the populace, who are held, essentially through brute force, in penury.  These persons become wealthy beyond all imagination, but through thievery.  Recall that the important caveat to the rule that Trade Creates Wealth is that it does not apply if one is stealing, as that is just an involuntary transaction that destroys wealth.  Enrichment by thievery, even government thievery, is always wrong.  (Contrary to the Leftists' claims, the economic systems just described are not in nations run by right-wing dictatorships, but the Leftist utopias of modern-day Russia, Venezuela, Cuba and North Korea, left-wing dictatorships whose oppressive power structures Leftists curiously decline to criticize.) But the power structure that permits an oppressive few to enslave a whole nation and become "rich" simply does not exist in the United States. Thus, we can't call "rich" persons evil here because they are members of a class that preserves its status by oppressing and stealing their wealth from others.  (If certain persons are getting wealthy through theft, they should go to jail, of course, but we don't have a class of "rich" who preserve their wealth through theft.)

But if the "rich" are not those who got that way through oppression, then who are they?  They are not born into wealth, as many of the wealthiest Americans came from families of modest means (Warren Buffett, Bill Gates, the late Steve Jobs).  And even if a person is fortunate enough to be born into a family that earned and saved money to hand down to future generations, that does not make him or her evil.

So who are "the rich" different from the "rest of us?"

No Such Thing as Wealth Redistribution

Once we understand that involuntary transactions destroy wealth (see post here), some important consequences become clear.

First, wealth redistribution is never wealth-neutral.  There is less total wealth after redistribution than there was before.  It does not merely re-slice the pie.  It takes a good chunk of the pie and throws it away, leaving less for everyone.  So, there really is no such thing as wealth redistribution.  There are only voluntary transactions, which create wealth, and involuntary transactions, which destroy wealth.  There is wealth creation and wealth destruction; there is no wealth redistribution, because all wealth redistribution is in fact wealth destruction.

Second, just like wealth creation builds on itself, creating more wealth with each transaction, wealth destruction builds on (or shall I say disintegrates?) itself, too.

Involuntary Transactions Destroy Wealth

I hope we have established that voluntary transactions in a fair market increase the wealth of all traders. My question: What do involuntary transactions do to wealth?

First, let us define "involuntary transaction." Stealing, of course.  Taxes, too.  Maybe even regulations and laws that make your property less productive and useful.  But in general I mean any transaction that one participant does not wish to enter into, but is required to by some external force.  What happens to the total quantum of wealth in such transactions?

Trade Creates Wealth

When was the last time you grew a vegetable and ate it?  Or fixed your own air conditioner?  Congratulations if you did, because, guess what, you created wealth.  Through your work, you created something that wasn't there before--a vegetable, a working air conditioner--and made yourself better off.

But I suspect that not many of you grow your own vegetables or fix your own air conditioner.  Instead, when you need a vegetable or a fixed air conditioner, you do what most everyone else does and you pay for them.  You exchange some of your wealth for these things you need, and those who have what you need gladly take that wealth and provide those things.  This is what we call trade.

If you become more wealthy by working yourself to grow a vegetable or to fix an air conditioner, aren't you less wealthy if you have to pay someone else to provide those things to you?

Welcome

I have a few thoughts.  I want to share them.  It is as simple as that. Perhaps my thoughts will make a difference, make others think, make them re-think, make them re-discover some basic truths.  Perhaps not.  But the catharsis of putting words to my thoughts and sending them out "there" for someone to read will be worth it.  So here goes.

This blog is dedicated to a simple principle, but a principle with far-reaching consequences.  That principle is this: Wealth is the product of individual work, invention, investment and trade.  Through each of these, wealth--and we will define what that means later on--is created, meaning something that wasn't there before is there now.  The creation of wealth is nothing less than amazing, an under-appreciated miracle of human effort and ingenuity, which occurs millions and millions of times each day, all over the world.  In its most robust form, wealth-creation lifts entire populations out of poverty, spawns innovation and invention, produces abundant necessities--food, shelter, medicine--and allows humans to enjoy the most fantastic form of wealth there is: leisure.  Wealth-creation should be the highest goal of any civil government, for it maximizes liberty and prosperity.

What do I mean by "wealth"?  I don't mean money.  Money is just a representation of wealth, a medium of exchange, though which things with true value, which reflect true wealth, are traded.  You can't do anything with money as it is (well, except maybe burn it, but that would hardly be putting it to good use).  All you can do with it is buy things, and those are the things that have true value.

So wealth isn't money, but it isn't pure material goods, either.  Wealth is also found in the value of services you can hire to perform tasks you can't do or don't want to do, or can't do as well or as efficiently as someone else.

But wealth is not only the value of goods and services you can buy.  For, as pointed out above, the most fantastic form of wealth you can enjoy--leisure--can't be bought, strictly speaking, but can only be obtained as the result of having earned and saved well enough that you have time to do something other than work.  This form of wealth is now available to nearly everyone in Western economies, and much of the entire world, in abundance, yet only a few generations ago it could only be claimed by kings and princes.

Thus, wealth is one's subjective wherewithal.  It is one's own economic power to earn and spend, to obtain what one needs or desires, or not to earn and spend but to enjoy one's leisure, in the balance one desires.  And it is important to realize that wealth is subjective.  One who is poor in material goods but satisfied with the little pleasures of life--books, a child's giggle, a sunny breeze through one's hair--may be just as "wealthy," in his own estimation, as someone else who has everything but no time to enjoy it or no one to enjoy it with.

So that's the nature of wealth, and I think economists and political philosophers will back me up.  But here's the thing many miss about the nature of wealth, which is what I want this blog to focus on: Unless one is stealing, no one gets wealthier by making someone else less wealthy.  Many people believe the exact opposite, but they are exactly wrong.  They believe all wealth is fixed; that there is no such thing as "creating" wealth, only moving some fraction of the same quantum of wealth from one person to another; that the pie is always the same size, and for someone to have a bigger slice, someone else has to have a smaller one.  But that's just not so.  The nature of wealth is in fact the opposite.  Indeed, for one person to gain wealth, he almost has to make others he deals with wealthier, too.  In other words, wealth-creation is not a solo enterprise, at least not when it gets going full steam, but is a community- and nation-wealth-building enterprise.  Far from a zero-sum game, in which an addition of wealth here means a subtraction of wealth somewhere else, wealth-creation adds to the sum with every transaction.  It entails an exponential expansion of the pie.

Why is this right? Consider: We said wealth is the product of work, invention, investment and trade.  Certainly it is easy to imagine how wealth can be created out of work, invention and investment.  You make a chair out of wood and sell it for more than the material costs; your work yields the extra wealth created by making the chair.  Or you invent a new chair design and sell the design to a furniture manufacturer, who sells thousands of them and pays you a royalty; your invention created the wealth of  the new useful item.  And investment yields wealth by putting resources into the hands of others who can apply their work and invention, paying you a dividend for taking a chance on them.

But how does trade create wealth?  Trade is the source of the real miracle of wealth-creation, but I will save that for my next post.