Support from None Other than Milton Friedman

Faithful readers will know that I have attempted, over several blog posts, to make a few points about economics, most of which I know are not original to me, but for which I have not provided citation to authority.  I now have found some excellent authority for some points, but still no authority for a very important point, and I'm starting to think it is original to me.  I'm happy to be proven wrong.

On several occasions I have posited that "trade creates wealth," or that voluntary transactions in a fair market make both traders better off, thereby increasing the wealth of the whole economy over what it was prior to the trade. Milton Friedman notes it is an "elementary--yet frequently denied--proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed." (Milton Friedman, Capitalism and Freedom at 13 (Univ. Chicago Press 2002) (originally published in 1962)).  An interesting website for the teaching of economics provides a video demonstration of trade creating wealth in a classroom exercise.

"Profit" is therefore nothing but the wealth created from trading (or from work, investment or invention). If you profit from trade, then so did those with whom you traded. Profits are not evil, but are the product of wealth creation, which is the opposite of poverty. Just as trade creates wealth, trade destroys poverty.

Friedman also supports my larger point that liberty and prosperity are tied to each other and symbiotically enhance each other. As he says, "The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.  Historical evidence speaks with a single voice on the relation between political freedom and a free market."  (Id. at 9).  From this, Friedman concludes that capitalism is a necessary, although not sufficient, condition for political freedom.  (Id. at 10). If so (and I agree it is), then the political freedoms guaranteed by our Constitution must include the right to economic freedom, as the former cannot exist without the latter.  The Declaration of Independence begins with the proposition that all men are endowed by their Creator with the rights to life, liberty and the pursuit of happiness, and the Fifth Amendment to the Constitution prohibits the government from depriving anyone of "life, liberty or property" without due process of law.  "Liberty" entails economic freedom. We have a Constitutional right to it, which means the government has no right to impose socialism or other restrictions on that freedom.  Since the New Deal, however, the Supreme Court has consistently treated the right to economic freedom as non-existent. We are now seeing the injury to our political freedom as a consequence.

The link between economic freedom and political freedom leads me to another observation, which is that although politicians and commentators (including talk-radio and cable hosts) know a great deal about political rights and constitutional protections for them, they know next to nothing about economics.  They cannot explain why free market capitalism isn't evil, but is in fact a tremendous good that has destroyed more poverty and done more to enhance the quality of life of billions of people than any other economic activity in history.  We will not return to prosperity until members of the political class learn to advocate free market capitalism as the system that maximizes wealth for all elements of society and act to restore economic freedom by reducing governmental restrictions and activity to a bare minimum.

I have not been able to find authoritative support for the reverse of the proposition that "voluntary transactions create wealth," which is that involuntary transactions destroy wealth.  I presented an explanation here why I think this must be true, but so far I don't see it postulated elsewhere.  Wealth redistribution is the clearest example of wealth destruction, but any taxation to pay for government spending that does not pay for a public good (defense, fire stations, needed bridges) that makes us as a group better off than without it also takes more wealth than it creates.  Such government spending therefore never can operate as a "stimulus" to the economy. If this is correct, nearly everything government does to "help" us instead hurts us. We are failing to realize prosperity precisely because the government is spending so much to make it happen. Only voluntary transactions create wealth, and the government cannot create it by robbing Peter (or Peter's grandchildren) to pay Paul; in fact it destroys wealth by doing so.  I would be very pleased to be told of an authoritative analysis that backs me up.

Dow 15,000: What's the big deal?

Yesterday's job report said only 165,000 jobs were added in April -- anemic by historical standards but more than "expected," so woohoo!, the stock market celebrated by sending the Dow Jones Industrial Average over 15,000.  (Briefly; it closed at a record high of 14,973.96.)  Commentators seemed to find this significant, as if the DJIA's touching the dizzying height of 15,000 was proof of renewed economic prosperity.

But is it?  Is Dow 15,000 "high" in the history of that index?  Or is it what would be "expected" at this point in time, given how the index has grown in the past, or is it even "low."  If that level is only "expected," then the index's hitting 15,000 is not really news, and certainly not an indication that the government's economic policies are doing anything special.  But if it is "low," the news is that the economy is still under-performing, despite years and years of billions of dollars of funny money being pumped into the markets by the Fed, and despite so-called "stimulus" deficit-spending by the government.

So, let's look at that history.  Do you remember where the DJIA stood the month before Ronald Reagan was elected?  4000?  2000? 1000?  Nope, lower than that.  It was 950, in a range it had been for years before. Looking at the index each year (October) after that, we see it dropped in 1981, but in 1982 it went up to 987, a 17.8% increase from the prior year. In 1983 it went to the dizzying height of 1264, a jump of 28%.  By the end of the Reagan-Bush years, in 1992, the index stood at a mind-blowing 3240, an increase of 241%, or an average of 18.5% per year.

As everyone knows that level of growth just isn't sustainable -- but it was even better throughout the Clinton years. From 1993 to 1999 the DJIA clocked regular, and huge, increases, and by October 2000 it stood at 10,192.  That was an increase of 215% from 1992, or an average of 23.8% per year.

After 2000, the DJIA practically hit a brick wall. In 2005 it was still around 10,200, and by 2008, following the financial crisis spawned by loose credit and the asset bubble that resulted, it had fallen to 9325. That is where it stood when Obama was elected.

I have my theories as to why the pro-growth policies of Reagan-Bush continued to pay dividends despite the Clinton tax hikes -- in general, even after Reagan-Bush, we continued to enjoy less regulation, less hostility to business and investment, more encouragement of research and technology development, and economic stability fostered by national and international security (in turn fostered by our military might) -- and why some anti-growth policies of the Clinton years began to be felt in 2000, before George W. Bush took office.  But that's beside the point. My focus here is on what the DJIA could be today if the growth it  enjoyed from 1980 to 2000 -- or even just in the Reagan-Bush years -- continued to 2013, as the prosperity, wealth creation and improved standard of living we all enjoyed during that period is the "normal" we still aspire to.

As it happens, however you dice the numbers, the Dow should be way above 15,000 now.  Here is a graph of the DJIA from 1980 to 2013 (using an October close as a proxy for the year):

Average annual growth in the index, as noted above, was 18.5% during Reagan-Bush, and 23.8% during Clinton.  What if we just took that lower figure and assumed that rate of growth continued after Reagan-Bush (as, in fact, it did during Clinton)?  Here is where we would be now:

Yes, we would be at Dow 115,000.  Your 401(k) would be a 4001(k), ten times bigger than it is.  You would be looking forward to an early retirement, not looking to work until you're 75.  You would be looking at a second home, a new car every few years, comfortably paying for college, paint for your house, a real vacation now and then.  At a minimum you would not be scrimping to get by and not constantly worried about how you were going to pay your bills.  That is "normal."

As the graph illustrates, an annual 18.5% growth rate was not "unsustainable" from 1992 to 2000.  There is no reason to assert it was unsustainable thereafter.

But let's say it was.  Let's say despite 20 years of 18-23% annual growth, only half of the Reagan-Bush growth rate continued post-2000.  Here is where we would be now:

Thus, we would be at Dow 35,000. Dow 15,000 is not even half of where we could be in this scenario.

Finally, even if you straight-line the trend from 1986 to 1999, so that the percentage growth each year is smaller than the year before, but the growth is constant, and extend that post-2000, we still should be above Dow 15,000:

No matter how you look at it, Dow 15,000 is low.  It is one-seventh of where it could be if the average growth of the Reagan-Bush years continued, and that is the "normal" we want. But even if growth had been pitifully slow, and just constant, we should be at Dow 17,000.

Dow 15,000? Big deal. Now excuse me while I go find some way to make money until I'm 75.

A Republican's Confession

So if the true reason the Democrats pushed to increase tax rates on the "rich" was to establish the precedent for making the government the ultimate judge of whether one's income is so high as to be "unfair," as a Democrat recently confessed, why did Republicans not make the case against that jaw-dropping proposition, one whose tenets are contrary to everything America has stood for since its founding? A Republican confesses the reason (or, to be more accurate, chides his own party for it) in a recent op-ed in the Richmond Times-Dispatch, saying that the issue isn't "tax cuts," per se, but ensuring liberty through limiting government:

Republicans forgot how to talk about what it means to be free. Freedom is rooted in the understanding that government is not the source of freedom and prosperity — those things belong to men and women as created beings and are actualized by their choices and hard work. If government is too big, if it taxes too much and over-regulates, then the people lose a portion of their freedom because they can no longer chart their own destiny and follow their dreams. 

Therefore, Republicans should be focused on reducing the size and reach of government. Voters need to understand that the battle is not about tax rates, it is about a government so big that it threatens their freedom. This will help redefine the debate as one about the relationship between the people and their government. If that is the debate, then conservative principles for preserving liberty can once again prevail.

Exactly.

A Democrat's Confession

The other day I posted that President Obama wasn't really interested in raising much revenue or in deficit reduction in his "Fiscal Cliff" brinksmanship. What he really wanted, I said, was merely to raise taxes on some portion of the population in the name of "fairness," and thereby set the precedent for the government's nosing through your finances to determine if what you earned or what you possessed was "fair," by the government's standard. The problem with that precedent, I said, isn't so much that it is bad  for prosperity (which of course it is), but that it is bad for liberty--it sets up the government as the final arbiter of who has too much and who has too little, depriving everyone of their liberty and making all of us serfs.

I now see that at least one Democrat, blogging at the Washington Post, admits that this was all along the true purpose of the charade we just witnessed. In his post, "Why Democrats insist on upper-income tax hikes", Jamelle Bouie (guest-blogging for Greg Sargent) confesses:

Rhetoric aside, there’s no doubt Democrats know that — barring a hike to pre-Reagan levels — there’s not much revenue to gain from restoring upper-income taxes to Clinton-era levels. And when it comes to deficit reduction, full employment — and robust growth — is the best solution. If upper-income tax hikes serve a purpose, it’s to slow the income gains of the wealthiest Americans, who — for the past decade — have reaped the lion’s share of gains from economic growth. 

If the presidential election did anything, it put inequality on the table as a national issue, and the fiscal cliff is one battle — albeit, by proxy — in a larger fight. And, unlike most issues in politics, the lines are clear — Republican disregard for inequality is matched by Democratic attempts to, however gently, apply the breaks [sic].

So the fiscal cliff battle was just part of a larger "fight" to "apply the brakes" to "the income gains of the wealthiest Americans." Democrats are not interested in economic recovery or deficit reduction. Rather, the election "put inequality on the table as a national issue."

All of this is Leftist code for "What's mine is mine, and what's yours is mine if I think it's fair." Left out of the discussion is any support for the notion that the "income gains of the wealthiest" come at the expense of anyone else--but that is the clear implication of the need for putting on the "brakes." What if the "income gains" came about because some people, for example, invented the iPod, and iTunes, and then the iPhone, and opened the door to hundreds of thousands of apps no one even thought of before, and thereby single-handedly revolutionized multiple industries while inventing others, creating a lot of wealth for themselves, but making the lives of millions and millions of people all over the planet exponentially better than before? Put the brakes on, please; we don't want all those people to have their lives bettered in ways they could not have imagined just 10 years ago because a few brilliant people might make some money.

To these Democrats, "equality" is a self-evident virtue to which all must aspire. Yet equality is not the principle upon which this country was founded. It was founded on the principle that all men are endowed by their Creator with the rights to life, liberty and the pursuit of happiness, rights which neither men nor governments can take away. Indeed, it is impossible for government to pursue "equality" without obliterating these rights. "Equality" therefore is the antithesis of Americanism.  It is the foundation of every impoverished, authoritarian Leftist dystopia on Earth and the first "principle" of every swindler who can't or won't succeed by doing, so seeks to succeed by taking. "Equality" is just envy, dressed up with false appeals to virtue. It is evil, and it is this evil that Republicans, and all Americans, should fight when opposing efforts to slow--to punish--anyone's "gains."

Let us pray we have more resolve for this fight in the next battle. 

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.

*  *  *

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.