P.J. O'Rourke Gets It

P.J. O'Rourke provides a typically very funny commentary in the Wall Street Journal on the fallacy of President Obama's redistributionist thinking.  O'Rourke points out that this thinking starts from the false premise that there is only so much wealth to go around, so if some have more it is because they have made others have less--the "zero-sum" fallacy.  (O'Rourke and others would help the argument if they pointed out, as I have, that the reason this is a fallacy is because wealth is created with economic activity, not merely transferred, so when some are better off it is almost always because they have made others better off, too.  The economy, free of unnecessary government intervention, is a positive-sum activity.)

As I have observed earlier in this blog, Obama's attack on the "rich" is not really intended to help the "poor," for whom the President rarely expresses any concern.  Rather, he seeks to punish the inventors, innovators, job-creators and wealth-creators (derided as "the rich"), for no apparent reason other than to punish them, and certainly not to help those in poverty.  Thus, Obama doesn't wage a War on Poverty; he wages a War on Prosperity.  O'Rourke completely gets it, and he says it much funnier than I can:

In this zero-sum universe there is only so much happiness. The idea is that if we wipe the smile off the faces of people with prosperous businesses and successful careers, that will make the rest of us grin.

There is only so much money. The people who have money are hogging it. The way for the rest of us to get money is to turn the hogs into bacon.

Mr. President, your entire campaign platform was redistribution. Take from the rich and give to the . . . Well, actually, you didn't mention the poor. What you talked and talked about was the middle class, something most well-off Americans consider themselves to be members of. So your plan is to take from the more rich and the more or less rich and give to the less rich, more or less. It is as if Robin Hood stole treasure from the Sheriff of Nottingham and bestowed it on the Deputy Sheriff.

Unearned Transfers Destroy Wealth

I have written before about sound economic thinking from Arthur Brooks, president of the American Enterprise Institute.  He publishes in today's Wall Street Journal an article making the case that "unearned transfers"--such as winning the lottery--generally impede happiness rather than increasing it. We have all heard the stories about how lottery winners' lives turn to hell, as they lose family and friends, spend recklessly and wastefully, and turn to drugs, alcohol or other addictions.  As he says:

But hitting the jackpot generally leads to unhappiness. A famous 1978 study of major lottery winners in the Journal of Personality and Social Psychology showed that while the winners experienced an immediate happiness boost right after winning, it didn't last. Within a few months, their happiness levels receded to where they had been before winning. As time passed, they found they were actually less happy than they had been before winning.

Does this suggest that money makes us unhappy? Not at all. There is a huge amount of research showing that money, when earned, has a generally positive association with happiness. The problem is when it is unearned, when raw purchasing power is untethered from hard work and merit. Above basic subsistence, happiness comes not from money per se, but from the value creation it is rewarding.

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While earned success facilitates the pursuit of happiness, unearned transfers generally impede it. According to the Panel Study of Income Dynamics, going on the welfare rolls increases by 16% the likelihood of a person saying he or she has felt inconsolably sad over the past month (even after controlling for poverty and unemployment). A study by economist John Ifcher at Santa Clara University shows that single mothers who were required by the 1990s welfare reform to work for their benefits—and therefore lost leisure time, had to find child care and the like—were still significantly happier about their lives after the reforms than before.

Brooks thus helps make my point that recipients of wealth redistribution or other involuntary transfers do not value what they are given as much as those from whom it was taken value what they earned.  Thus, my theory seems to hold up: involuntary transactions, or unearned transfers, destroy wealth.  Society is harmed, not benefitted, by such transfers.  Is it any wonder, then, that the saddest and poorest places on Earth are where success is taxed out of existence or confiscated, and redistribution is the norm?

What's Wrong with Sticking It to the "Rich"

As we all know by now, President Obama has refused to agree to extend the Bush-era tax rates unless tax rates on the "rich" are increased. (You know the President is fond of calling these rates the "Bush tax cuts for the wealthy," even though they reduced taxes for everyone and were approved by a Democratic Congress in 2001 and extended in 2010, also by a Democratic Congress, with Obama's blessing, because he was "not willing to let our economy slip backwards just as we're pulling ourselves out of this devastating recession.") He is willing to let all tax rates go up if he doesn't get his way, and apparently to let the economy slip backwards now, even though the economy is hardly better than it was two years ago.

Why does the President take this position? He says he is concerned with the budget deficit, but the tax rate increase he seeks will yield very little in additional revenues, even under the most optimistic predictions, and certainly will do nothing significant to reduce the deficit. And if he were really concerned with deficit reduction, he would be advocating for real cuts in federal spending, something he hasn't done. To the contrary, the President still advocates increased deficit spending as a "stimulus," so he has no real interest in reducing the deficit.

He doesn't claim higher tax rates on the "rich" would help the economy.  Nor is there any basis to believe they would.

President Obama's real goal is sticking it to the rich.  He cloaks his goal with seeking "fairness," as if a 35% tax rate is too easy on the "rich," but "fairness" would be achieved if the rate were 37%.  In truth, therefore, the "fairness" problem for the President isn't that the tax rate is too low, it's that some people earn, or have, too much, and fairness requires that some of what they have be taken away.

So what is wrong with sticking it to the rich?  Well, there are so many things wrong with that thinking that it is difficult to know where to start.  But let us start with this: Americans should shudder with horror at the suggestion that their government should claim the moral right to determine whether it is "fair" that anyone has what they have, for by making that claim the government seeks to justify confiscation--which is nothing more than stealing. Since when have the American people empowered their government to go door to door and inquire whether it is "fair" that one earns the income he or she earns, or whether it is "fair" that past income has yielded one's house, one's car, one's possessions, savings and investments?  Since never, of course, and Americans should firmly assert that they never will.

Some point to our history of progressive tax rates in the tax code, by which those with higher incomes pay higher rates than those with lower incomes, to suggest that tax policy has always been concerned with "fairness." But progressive tax rates have always been justified only as a means of fairly distributing the burden of paying for government, not as a means of confiscation from some because what they have is unfair.  American policy has never justified using the tax code as means of redistribution or confiscation. Obama does not want to raise rates on the "rich" to ensure progressive tax rates--indeed, the top 5% of earners already pay more than 58% of the taxes, making the current tax rates hugely progressive. Instead he just wants to take wealth from some because he thinks what they have is unfair.

Many argue that raising tax rates on the "rich" will injure the economy, and doubtless it will. But it is more injurious than merely its economic effects. Taxing some more because the government concludes that taking their money is just "fair" constitutes the most egregious deprivation of liberty. It is not merely the "rich"--those high-earning, successful, productive wonderful people who create wealth for everyone else in huge multiples of what they create for themselves--who are hurt by that deprivation of liberty, because once we permit government to cross that line, and give it the power to decide who has "too much" and who has "too little," we have ceased to be a country of free men and women and have become a nation of serfs, all of us beholden to government for everything. What we earn will truly not be our own, but constantly subject to what the government decides we may keep, in the name of "fairness." Yes, Obama cleverly limits his argument to taxing a wealthy few, so few will object, but what he wants isn't limited to a few: what he wants is to establish the principle that government can decide how much of your own money you get to keep, just because it thinks it is fair. That's not tax policy, that's totalitarianism.

Yet how many Republicans make this argument, or how many talk-radio hosts? If they have, I haven't heard them.  As I have said before, Obama isn't about fighting a War on Poverty; he is all about fighting a War on Prosperity. No matter how much money you earn, whether you are spared Obama's promised tax increases or not, you should personally fight for prosperity, for liberty, for your right to earn what you can and keep what you earn and be taxed only as necessary to pay what government needs to do, nothing more. To fight the war, pass this on, write letters to the newspapers, call up the talk show hosts and insist they convey the message, write to your congressman and insist that they vote to protect your liberty. Do it.

Reagan Speaks on the 2012 Election

Before he died, Ronald Reagan sent a message to the voters of 2012, offering an astute analysis of the choice we face in this election.  He said our choice is between, on the one hand, higher taxes, increased government power, increased debt, decreased freedom, wealth destruction, and fomenting war and strife abroad in the name of "appeasement" of our enemies, and, on the other hand, vigorous defense of our liberties, decreased government interference in our lives, greater prosperity through honest work and free markets, and true peace through strength.  His prescient message asks if we are willing to defend the freedoms the nation was founded upon, noting, "This idea that government is beholden to the people, that it has no other source of power except the sovereign people, is still the newest and most unique idea in all the long history of man's relation to man."  He continues:

This is the issue of this election: Whether we believe in our capacity for self-government, or whether we abandon the American Revolution and confess that a little intellectual elite in a far distant capital can plan our lives for us better than we can plan them ourselves.

Reagan's complete video message to the future is below.  Incredibly, it was recorded in 1964.

Young People Plead for Liberty and Prosperity

An interesting video is making the email circuit, embedded below, made by a group of young people (teens and twenties) called "im2moro". A statement of their principles interestingly lists "Liberty" and "Prosperity" as among the 7 principles to which they subscribe (along with Justice, the Sanctity of Private Property, and the right to Life and Pursuit of Happiness through free markets).  The plea in their video that those of us with a vote must exercise it to prevent imposing trillions of dollars of debt on the voteless generation, and generations to come, is quite affecting.

Ryan Advocates Wealth Creation, not Wealth Division

Paul Ryan spoke the other day stating that the Romney/Ryan plan would foster wealth creation instead of wealth division.  I, and the rest of America, would welcome more details, but at least someone running for national office has the right idea.


 

Cronyism Destroys Wealth

In an excellent opinion piece in the Wall Street Journal, Koch Industries CEO Charles Koch recently sounded many of the themes of this blog, noting that voluntary transactions create wealth through "win-win" outcomes--that is, both sides of a voluntary transaction, producers and consumers, are better off, and therefore wealthier, as a result of the transaction. He points out that in countries in which economic freedom is the norm the poorest segment of the population is ten times better off than the poor in other countries.  As Koch says:

The role of business is to provide products and services that make people's lives better—while using fewer resources—and to act lawfully and with integrity. Businesses that do this through voluntary exchanges not only benefit through increased profits, they bring better and more competitively priced goods and services to market. This creates a win-win situation for customers and companies alike.

Only societies with a system of economic freedom create widespread prosperity. Studies show that the poorest people in the most-free societies are 10 times better off than the poorest in the least-free. Free societies also bring about greatly improved outcomes in life expectancy, literacy, health, the environment and other important dimensions.

Koch goes on to make the observation, as I do, that government interference in the economy makes the economy worse off.  While I have pointed to a variety of interferences, such as wealth redistribution, boondoggle spending, and over-regulation, as causing wealth destruction, Koch points to another one increasingly common since the 2008 financial crisis: cronyism (or what Ayn Rand called "crony capitalism").  In this version of wealth destruction, the government is a biased umpire in the game, picking winners and losers, usually in favor of those who pay most for government's influence.

Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers.

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We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn't ordinarily buy. 

Koch points out, too, that American business, routinely viewed as Republican in its politics, too often capitulates to the temptation of cronyism to seek the patronage government can bestow, thereby corrupting government and economics and feeding the statists' hunger for power.

To end cronyism we must end government's ability to dole out favors and rig the market. Far too many well-connected businesses are feeding at the federal trough. By addressing corporate welfare as well as other forms of welfare, we would add a whole new level of understanding to the notion of entitlement reform.

If America re-establishes the proper role of business in society, all kinds of benefits will accrue. Our economy will rebound. Our liberties will be restored. And when President Obama tells an entrepreneur "You didn't build that," everyone will know better.