Liberty and Prosperity

On Liberty and Government Shutdowns

2013-11-05T21:53:00.001-05:00

As I write, the 16-day "shutdown" of the federal government in October 2013 is a distant memory, having quickly been overshadowed in the public mind by the complete catastrophe of the launch of the Affordable Care Act's insurance "exchange." The shutdown is portrayed as having accomplished nothing. That's incorrect. Indeed, the shutdown demonstrated something those of us who love liberty should never forget: what an all-powerful government can do to you.

I think all of us heard that with the shutdown the federal government closed national parks. Many of us also heard that the government went further than this and went out of its way to block access to parks that have no gates, fences, admission fee or restricted access, like the World War II Memorial on the National Mall, which is directly accessible from the street or sidewalk, 24 hours a day.

World War II Memorial on 17th Street, Washington, D.C.

In an act of pure spite, the Obama Administration made sure that access to this Memorial was blocked to World War II vets specially flown in (through the work of the Honor Flight Network) so that they could see their memorial, and to do so the Administration had to pay extra (while the government supposedly had no money and had to "shut down") to bring in barricades.

Park rangers and police blocking access to the WWII Memorial

WWII vets outside the barricaded WWII Memorial

In addition, the Administration put up barricades around the National Mall attempting to block sidewalks and the like.

Pointless barricades on the National Mall, making a point nevertheless

These barricades were ridiculous, since one could just walk around them, and no one was enforcing the supposed "prohibition" on entering, but they made a point nevertheless: the area was under government control, and if the government chose it could keep you out. Moreover, it could keep you out not because letting you in cost money, but because it wanted to make you feel the pain of its power--that is, so it could make you feel the government's displeasure at being deprived of your money. That is the point of the barricades.

Indeed, most people don't realize this, but the Administration went further and closed streets and roads in Washington, D.C. It closed Jefferson Drive and Madison Drive on the National Mall, Ohio Drive along the Potomac River, and Beach Drive in Rock Creek Park. All of these streets serve not only the parks in which they are located but also regular city traffic.

Ohio Drive, Washington, D.C., during the shutdown, empty of traffic

To me, closing these streets to the public represents the most threatening and most serious abuse of governmental power resulting from the shutdown, but it is the least mentioned. Why most threatening? Consider: we know that blocking access was not done to save money--rather, it cost money. It was done to make us feel the pain of pushing back against government. In other words, in its pique, the government went out of its way to deprive us of something to which we are entitled: to move about on the public way. In doing so it deprived us of a fundamental liberty. Indeed, without that liberty we couldn't earn our living, we couldn't buy our food, we couldn't exercise our freedom of religion. Nearly all of our rights depend on the right to travel. Without it, we die.

Yes, in this case the federal government shut down access to only a few streets over which it has jurisdiction. But if the federal government can do that, and deprive us of the right to travel over those streets, what is to stop the state and local governments from blocking access to every street? The principle is the same. If we deign to complain ever so slightly about the government's voracious appetite for our money, its answer is to close our streets, to imprison us in our homes, to deprive us of all liberty until we cave in. We become government's slaves rather than its masters.

So the shutdown accomplished a great deal. It proved that when the Left runs the government, it does not do so to free us, it does so to enslave us. All of its lies to the contrary are now apparent. Be warned.

Tax the Rich to Punish the Poor

2013-08-20T21:40:00.002-04:00

Silicon Valley entrepreneur T.J. Rodgers published an op-ed in the Wall Street Journal yesterday, called Targeting the Wealthy Kills Jobs. Mr. Rodgers makes the excellent point that punishing the "wealthy" (which really means those who work, create, innovate, invent, build, and invest successfully, to the benefit of us all) ends up really punishing the poor--those who need a job and can't find one. He provides his own experience showing that private investment in small business creates more jobs per dollar invested than so-called "stimulus" programs, by a large margin. But taxing those who would make those investments means those jobs are never created. As he says:

This data squares with the broad numbers showing that private investment is more efficient than government spending in creating jobs. In other words: Every dollar that is taxed away from private investment and spent by government produces fewer jobs than the jobs destroyed by the loss of private investment.

Or as I might say it, government spending destroys wealth.

Here is his take-away point:

Yet the politics of envy, promoted most notably by President Obama himself, continuously stokes the idea that the wealthy are not paying their "fair share." This injured sense of unjust rewards was summed up on a radio show I heard the other day, when a caller said of the rich: "How much more do they need?"

How much more do I need? How many more jobs do you want?

A Keynesian Proof that Government Spending Makes Us Poorer

2013-08-19T21:46:00.002-04:00

James Taranto, a daily online columnist for the Wall Street Journal, recently posted a piece making a point I have attempted to prove: that to the extent government spending is merely redistribution of wealth, or is devoted to things that are not "public goods" whose expense is less than their benefit, it has the same economic effect as stealing, and it therefore makes us all poorer by destroying wealth. Here is his piece:

Bloomberg View's Matthew Klein offers an amusing application of Keynesian logic. He notes a New York Post story about a ritzy Park Avenue apartment building that has been the target of several burglaries. While conceding that "crime is destructive to the social order and discourages people from making long-term investments," Klein argues that the short-term effect of large-dollar property crimes is stimulative for the economy:

When the thief fences $10,000 or $100,000 in jewelry from an heir who barely knows what he owns, the thief will feel much richer and spend most of that money. Maybe he will buy a new car, or go on a bender at strip clubs, or rent a villa in a beleaguered European country. The heir might be somewhat upset, but it's hard to believe that he will suddenly cut back on his spending because he needs to recoup a relatively small loss. In fact, the heir might end up spending more money as he tries to make his apartment safer from future robberies.

Klein acknowledges the argument isn't original. He quotes the economist John Cochrane, who in 2009 made essentially the same argument with respect to a massive fraud: "If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it." This is all somewhat tongue-in-cheek, but Klein's conclusion seems serious:

Cochrane writes as if our moral revulsion at Madoff's fraud will overwhelm the logic of his interpretation of Keynes. I can't help but wonder whether redistributing a little bit of wealth from those who have more money than they know what to do with to those who are eager to spend whatever they can get would make the rest of us better off--at least temporarily. Maybe we could accomplish the same sort of effect by tweaking the tax code. At least that way we could avoid rewarding people who break the law.

Behold, a Keynesian proof that taxation is theft.

Of course, theft does not stimulate the economy, but depresses it: The value of what is stolen is much less to the thief than to the victim, so the net result of the "transaction" is negative. But it is ironic that some who promote redistribution as "stimulative" essentially recognize it is theft, even as they fail to recognize that proving it is theft proves that their claim of "stimulation" is false. Indeed, to say that thievery boosts the economy so defies common sense that only an economist could say it.

Support from None Other than Milton Friedman

2013-06-25T22:39:00.000-04:00

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?

2013-05-04T10:19:00.000-04:00

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

2013-01-06T21:18:00.001-05:00

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

2013-01-02T23:25:00.000-05:00

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

2012-12-29T21:50:00.001-05:00

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

2012-12-19T22:52:00.000-05:00

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"

2012-12-12T23:22:00.000-05:00

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

2012-10-09T21:50:00.000-04:00

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

2012-10-09T21:10:00.000-04:00

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

2012-09-16T23:15:00.001-04:00

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

2012-09-16T22:56:00.001-04:00

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.

The Choice We Face in This Election

2012-08-14T23:25:00.000-04:00

In the course of a campaign speech on Monday, President Obama let slip a reference to his vision for government's role in the economy:

Contrast this with Paul Ryan's vision for government's role:

President Obama is right. This election presents a stark choice. Between "sharing the wealth" (which means only "destroying the wealth") or "building the wealth." Between statism and individual liberty. Between decline or prosperity. Between condemning the achiever--taxing him, ridiculing him, denying his achievement and saying, "You didn't build that,"--or praising the risk-taker, the entrepreneur, the capitalist who created the business and invented the product and hired the employees by the thousands and who made everyone wealthier in the process. Between a government on your back or a government that gets out of your way. Between socialism--rancid, sniping, griping, swiping, envious, petty, demoralizing and dehumanizing socialism--or freedom--self-advancing, horizon-expanding, limitless, dream-fulfilling, ennobling, uplifting, soul-perfecting and wealth-maximizing freedom.

You pick.

Proof that "Stimulus" Is a Depressant

2012-08-07T01:04:00.000-04:00

I have posited that involuntary transactions are the opposite of voluntary transactions in their effect, and in fact they destroy wealth rather than create it. For this reason, government spending on anything other than certain clear public goods--goods that make us all better off, like needed bridges (and not bridges to nowhere)--destroys wealth. Government spending of this sort does not merely reslice the pie, it makes the pie smaller. It cannot "stimulate" the economy the way private voluntary transactions do, because its effect is negative. With each involuntary transaction, such as taxing Peter to pay Paul, the economy is further hurt, not helped.

Unlike my assertion that trade creates wealth, my claim that involuntary transactions destroy wealth apparently has not been declared a law of economics, at least as far as I can tell. I've read many books, essays and articles looking for support, and haven't found any. But an article in today's Wall Street Journal comes close.

Arthur Laffer writes today that the record of recent "stimulus" spending by major economies shows that an increase in such spending is negatively correlated to the rate in growth of gross domestic product, or GDP. In other words, the more governments increased their spending, the more their economies' rate of growth declined. Here are Laffer's data (pulled from the International Monetary Fund):

Laffer's presentation left me wondering whether there was a statistically significant correlation between increase in government spending an decrease in rate of growth. I took his data and put them in a scattergram to see, then I added a trend line. Here is what it looks like:

On this chart, the x-axis is percentage increase in government spending, and the y-axis is percentage increase in rate of GDP growth. Where government spending was reduced or increases kept small, the country's rate of GDP growth suffered less in the 2008-09 downturn. Where increases in government spending were higher, the decline in GDP growth was higher.

As you can see, the data points are pretty tight, so I'd say the trend line is relatively reliable. It shows that on average a 1% increase in government spending means a 1.5% decrease in rate of GDP growth. This correlation is the opposite of what you'd expect to see if increased government spending were a "stimulus" or "jump start" to an ailing economy. If it were, you'd expect to see those countries with higher increases in government spending seeing higher rates of GDP growth. But you don't.

Laffer therefore correctly points out that the data do not support a government policy of stimulus spending, that what is called a "stimulus" is actually a depressant:

If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment.

Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

(Emphasis added.) On this last point I have to disagree with Laffer (at least as far as these data go). The wealth effects of additional government spending do not sum to zero. If they did, we would expect the trend line on the chart above to be flat: with each percentage increase in spending, the effect on GDP growth would be zero, as each dollar taken is replaced by another dollar spent, and no change in the rate of growth would take place. Instead, as Laffer's own data suggest, the wealth effects of additional government spending are negative--they sum to less than zero. Wealth is being destroyed by each extra dollar of government spending, because the dollar taken from each taxpayer is worth more to him than it is worth in the hands of each recipient.

Laffer's data appear to support my claim compellingly. Am I wrong?

Capitalism Creates Happiness as Well as Wealth

2012-08-05T22:22:00.000-04:00

Capitalism deserves praise, not just because it builds society's wealth, but also because it builds individual happiness. As British/Australian sociologist Peter Saunders wrote (Why Capitalism Is Good for the Soul):

By perpetually raising productivity, capitalism has not only driven down poverty rates and raised life expectancy, it has also released much of humanity from the crushing burden of physical labour, freeing us to pursue ‘higher’ objectives instead. What Clive Hamilton airily dismisses as a ‘growth fetish’ has resulted in one hour of work today delivering twenty-five times more value than it did in 1850. This has freed huge chunks of our time for leisure, art, sport, learning, and other ‘soul-enriching’ pursuits. Despite all the exaggerated talk of an ‘imbalance’ between work and family life, the average Australian today spends a much greater proportion of his or her lifetime free of work than they would had they belonged to any previous generation in history.

There is another sense, too, in which capitalism has freed individuals so they can pursue worthwhile lives, and that lies in its record of undermining tyrannies and dictatorships. As examples like Pinochet’s Chile and Putin’s Russia vividly demonstrate, a free economy does not guarantee a democratic polity or a society governed by the rule of law. But as Milton Friedman once pointed out, these latter conditions are never found in the absence of a free economy. Historically, it was capitalism that delivered humanity from the ‘soul-destroying’ weight of feudalism. Later, it freed millions from the dead hand of totalitarian socialism. While capitalism may not be a sufficient condition of human freedom, it is almost certainly a necessary one.

(Hat tip: professorbainbridge.com). Saunders thus echoes a theme of this blog, a point made by political economists over and over (but currently doubted by some): that free markets foster human freedom (and vice versa), that the right to prosperity (the pursuit of happiness) is just as much a God-given right as life and liberty, that liberty and prosperity are intertwined and interdependent. But we don't need to be told this: We know innately that free markets build happiness. No one died trying to cross the Iron Curtain to get into East Germany. No one sails a bathtub to cross shark-infested waters desperately trying to get from Key West to Cuba. And South Koreans do not take their lives in their hands to sneak across the DMZ to seek utopia in the north. Quite the opposite.

If people are willing to risk their lives to escape collectivist countries in order to live in a capitalist one, wouldn't you think those who already live in a capitalist country, and never risked anything to do so, would appreciate what they have been blessed with?

Who Is Today's Milton Friedman?

2012-08-01T23:04:00.000-04:00

Yesterday would have been Milton Friedman's 100th birthday. The Wall Street Journal published a great tribute to him yesterday by Stephen Moore, lamenting the "tragedy that Milton Friedman . . . did not live long enough to combat the big-government ideas that have formed the core of Obamanomics." Although the article goes on to apply a couple of Friedmanesque criticisms to Obama's economic policies (e.g., "There is no magical 'multiplier effect' by taking from productive Peter and giving to unproductive Paul."), its overall tone suggests that, if only Prof. Friedman were still alive, we might have a chance to counter the Left and prove to the American public, yet again, that the free enterprise system--the system that makes it possible to buy, affordably, houses and cars and air conditioning and iPhones and organic free-range chicken--is actually worth preserving.

(The Foundry Blog at The Heritage Foundation makes a similar point, in a post titled "Taxmageddon and Obamacare: What Would Milton Friedman Say?")

One is struck by that tone of lament. Yes, one pines for the sight of Prof. Friedman owning, say, Keith Olbermann in his smiling, gentlemanly and thoroughly ruthless way. That would be sweet. But are we without hope in reviving American passion for the American Dream given Friedman's passing? Are we left to ask, "What would Milton Friedman say" in order to make our points to a public misled by Leftist harangue? Is there no other free market economist with a knack for communication who could be today's Milton Friedman?

I really don't know, and I would be interested in others' views. In the meantime, we may have to be content sending around links to Friedman's PBS series, Free to Choose, to rally support for the cause.

Trade Creates Wealth: A Reprise

2012-07-30T22:05:00.001-04:00

I repost below my first substantive post (with a couple of updates), because the principle I set forth is even more important now that Obama's War on Prosperity is in full swing. With this repost, I am also "pushing" my blog to everyone I know, with the hope they will read what I have written, comment, and refer it to others. Put this on Facebook, send the link in an email. Rekindle the American Dream and end the American Nightmare.

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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?

The answer is, emphatically, no. In fact, I would say in the vast majority of cases, you are much more wealthy after paying someone else for these things than you are if you do them yourselves. One reason, of course, is the opportunity cost of your time. The time you spend to create one vegetable is worth a lot more to you than what you could pay to buy it, so buying it makes you that much better off. But another, and I think more important, reason is this: Every voluntary transaction between traders in a fair market provides to each trader more wealth after the transaction than he or she had before. I would say this a fundamental truth of economics, an iron law that every Econ 101 student should know by heart, although I have looked to see where this law has been enunciated by great economists and have yet to find it stated. No doubt Smith, Marshall, Pareto or Schumpeter recognized it somewhere, but until I find out where I will call this Pammachius's Law: Trade Creates Wealth. [As I state in a later post, in fact the principle was enunciated by David Ricardo and is known as Ricardo's Law.]

The rule that Trade Creates Wealth applies even to transactions where one can make or do the thing desired at relatively low opportunity cost. This is true because, otherwise, one wouldn't enter into the transaction. I can mow my lawn in about 15 minutes. I have the mower; I have the gas; I have the time; I even have the inclination (there is a certain satisfaction in exerting oneself and getting a nicely mown lawn as a result). But I can pay my neighbor's son $15 to do it for me, and I do. Why? The only reason must be that I am better off paying someone else $15 to do something than I am doing it myself, even though doing it would be easy, because otherwise I would refuse the transaction. I therefore am more wealthy paying to have my lawn mown than I am mowing it. I trade $15 for my neighbor's son's time and energy, but I get more than $15 back in increased wealth (a mown lawn, with no effort on my part) after the transaction. What's more, my neighbor's son gets $15, but that's worth more to him than the time and energy that he provides to do the job, otherwise he wouldn't do it. I'm better off; he's better off; we both are wealthier after the transaction than before. Trade creates wealth for both traders.

Let's return to the concept of opportunity cost to show just how powerful trade is in creating wealth. The example we just explored showed that wealth can be created even when opportunity cost is low: I have the equipment, materials, time and inclination to do the lawn mowing job, so doing the job doesn't require that I forego many other opportunities, and it therefore has a low opportunity cost. I am still wealthier by paying someone else to do it (as long as the price is right). But if I want a green pepper, the opportunity cost of creating it is quite high. I need a patch of land suitable for planting a garden; I don't have one. I need to till, fertilize, plant, water, tend, and weed, all at the right time, all presupposing I know how to do this, then at the end of this long process, I get my green pepper. In terms of opportunity cost, that pepper probably costs several thousand dollars, as that is how much I could have made earning wages with the time I spent, instead, growing a vegetable. Instead, I get the green pepper by paying $1.29, trading with my grocer. That trade, of course, makes me thousands of dollars better off than I would be if I grew the pepper myself. Thus, the greater the opportunity cost to you of making or doing something you need, the greater the wealth you are likely to realize when instead you trade to obtain it.

So, voluntary transactions in a fair market make both traders more wealthy. Trade does not make one trader poorer and the other richer; it makes both parties richer. Both traders can take their expanded wealth and trade with others, who themselves grow more wealthy; and they trade with yet others; and on and on; making trade the great exponential expander of wealth. Wealth doesn't "trickle down" to others; it rushes in a torrent, building and building, as long as trade is voluntary and in a fair market.

If voluntary transactions create wealth, what do involuntary transactions do? That will be my next post.

In Praise of Capitalism

2012-07-29T22:00:00.000-04:00

I almost named this post "In Defense of Capitalism." But since the post is about an article which makes the point, as I have attempted to on many occasions, that capitalism is the best thing that ever happened to raise the living conditions of humans on the planet, it needs as much "defense" as do "sunrises," "joy," or "vodka martinis." Things that are self-evidently glorious need no defense. Thus, capitalism is rather something to be praised, as are those who practice it, as they create wealth out of nothing and make us all wealthier as a result.

I get ahead of myself. The fantastic article is by the eminent scholar Charles Murray, and it is called Why Capitalism Has an Image Problem, in yesterday's Wall Street Journal. Mr. Murray eloquently demonstrates why capitalism (something I prefer to label "free market economics") is getting a bum rap, and why modern efforts to treat it as "evil" themselves are destined to impoverish us all.

I could quote the entire article, but that would be a waste. Click through and read it. Then send it to your friends. And tell them to send it to theirs. Everyone should read it, because the article makes clear the choice the presidential election gives us: A return to the complete embrace of the American Dream—that is, to aspire to success by self-reliance, individual freedom, and economic liberty, protected by limited government―or a continued slide toward a new American Nightmare, founded on collectivism, individual constraint and envy, enforced by an all-powerful government.

To get you interested, here is a sample:

[C]apitalism is the best thing that has ever happened to the material condition of the human race. From the dawn of history until the 18th century, every society in the world was impoverished, with only the thinnest film of wealth on top. Then came capitalism and the Industrial Revolution. Everywhere that capitalism subsequently took hold, national wealth began to increase and poverty began to fall. Everywhere that capitalism didn't take hold, people remained impoverished. Everywhere that capitalism has been rejected since then, poverty has increased.

Yet . . . "[c]apitalist" has become an accusation. The creative destruction that is at the heart of a growing economy is now seen as evil. Americans increasingly appear to accept the mind-set that kept the world in poverty for millennia: If you've gotten rich, it is because you made someone else poorer.

Mr. Murray doesn't point out here why this mind-set is false, which is because trading in a free market makes both sides of the trade better off, and capitalism (or free trade) therefore expands the pie rather than re-slices it. But he does identify why capitalism's "image" is weak: primarily, the divorce of economics from morality.

Another factor is the segregation of capitalism from virtue. Historically, the merits of free enterprise and the obligations of success were intertwined in the national catechism. McGuffey's Readers, the books on which generations of American children were raised, have plenty of stories treating initiative, hard work and entrepreneurialism as virtues, but just as many stories praising the virtues of self-restraint, personal integrity and concern for those who depend on you. The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived.

To accept the concept of virtue requires that you believe some ways of behaving are right and others are wrong always and everywhere. That openly judgmental stand is no longer acceptable in America's schools nor in many American homes. Correspondingly, we have watched the deterioration of the sense of stewardship that once was so widespread among the most successful Americans and the near disappearance of the sense of seemliness that led successful capitalists to be obedient to unenforceable standards of propriety.

Mr. Murray's prescription? In part, it is a government that holds people responsible for their harms and enforces virtue, but otherwise gets out of their way―in other words, the government we have always had until recently.

Making a living, starting a business and finding work that you enjoy all depend on freedom to act in the economic realm. What government can do to help is establish the rule of law so that informed and voluntary trades can take place. More formally, government can vigorously enforce laws against the use of force, fraud and criminal collusion, and use tort law to hold people liable for harm they cause others.

Everything else the government does inherently restricts economic freedom to act in pursuit of earned success.

But the prescription to make capitalism regarded as the dynamic, praise-worthy and wonderful engine of prosperity that it is also entails individual embrace of virtue:

To put it another way, it should be possible to revive a national consensus affirming that capitalism embraces the best and most essential things about American life; that freeing capitalism to do what it does best won't just create national wealth and reduce poverty, but expand the ability of Americans to achieve earned success—to pursue happiness.

Reviving that consensus also requires us to return to the vocabulary of virtue when we talk about capitalism. Personal integrity, a sense of seemliness and concern for those who depend on us are not "values" that are no better or worse than other values. Historically, they have been deeply embedded in the American version of capitalism. If it is necessary to remind the middle class and working class that the rich are not their enemies, it is equally necessary to remind the most successful among us that their obligations are not to be measured in terms of their tax bills. Their principled stewardship can nurture and restore our heritage of liberty. Their indifference to that heritage can destroy it.

Obama's War on Prosperity

2012-05-28T19:31:00.002-04:00

In my last post I noted that President Obama's current attack on Mitt Romney is predicated on his ability to make profits, as if making profits were evil. In doing so, I said, Obama appears to have declared war on prosperity. The more I think of it, the more I think this captures Obama's entire approach to the economy. Lyndon Johnson declared war on poverty, thinking that large government programs to help the poor would actually help them. That thinking was quite wrong, as we know now that the Great Society programs destroyed families, increased unemployment, promoted dependency, discouraged self-reliance and self-advancement and exacerbated class division, all while making poverty worse. But at least promoters of the Great Society actually wanted to help someone.

Obama's War on Prosperity, on the other hand, isn't designed to help anyone. It is designed to hurt someone, the many someones variously described as "the rich," "the 1%" and those who "make profits." There isn't anyone who is especially targeted to benefit from this war; just plenty of someones who are targeted to lose.

Consider: Obama never expresses particular concern for those in poverty. He does not identify with their plight or rail about their living conditions, their lack of food or sanitation or their poor education. His attention, rather, is on the "haves," and his true passion is directed at the "unfairness" of their having what others do not. He wants redistribution of wealth, not so much to help the poor, but to stick it to the rich.

Americans should recoil in horror that a sitting president should have these views, because they are contrary to everything Americans believe in. This land, unique in the world, is the land of opportunity, where getting rich is the American dream, and a dream that anyone, of any race, of any background, of any birth, can achieve. Anyone can attain as much success as he can, through hard work, smart investment, and virtuous living. And as I point out throughout this blog, the success one attains must result in success for others, as every purchase and every hire one makes makes the other party better off, too.

Can everyone be Warren Buffett? Clearly not, but success is not defined by having multiple billions of dollars. Success is improving your lot, giving your children a better opportunity than you had, a decent house, time with your family, health, and contentment. Millions of Americans routinely attained success throughout America's history, doing just these things, precisely because government let them live their lives as they wished and stayed out of the way. Today, success, even by these modest terms, is increasingly difficult for anyone to achieve.

Not that long ago striving for success, and the prosperity that went along with it, was taken for granted as the American creed. Obama's War on Prosperity rejects this creed and the commonality it gives us, and it seeks to pit us against each other. If it succeeds, inevitably we all will be poorer.

Maximizing Profits Is Good for the Economy . . . and for Reducing Poverty

2012-05-24T23:26:00.001-04:00

In the course of criticizing Mitt Romney the other day, President Obama said that, with respect to private equity firms like Bain Capital, we must "understand that their priority is to maximize profits. And that’s not always going to be good for communities or businesses or workers." His comment reveals his own misconception, and a common one among Leftists, that profits can be "bad" for "communities or businesses or workers." How are profits "bad"? The unstated premise must be that to earn a profit one has to make someone else poorer, if not steal from them. As Dwight Schrute might say, "False."

Putting aside situations where profits do result from stealing (or something close to it), profits reflect wealth creation, not only on the part of the corporation that "profits," but also by those with whom it deals--its customers, employees and suppliers. An article in today's Wall Street Journal seeks to correct the President's misconception regarding the evil of profits, and comes close to making the point I make here.

Professor Paul Rubin, a professor of economics at Emory University, writes:

Consider what contributes to profit maximization. In simple terms, profit maximization means producing the products earning the highest returns, and producing these products at the lowest possible cost. Both are socially useful behaviors that benefit consumers.

His thesis is therefore that profits are good because they benefit not only the "profiter" but also those with whom it trades--consumers. He concludes:

Consider the converse: What if a business does not maximize profits? Then it is either not making the products that consumers want the most, or it is not producing its products at the lowest cost. In either case, consumers are harmed. Any argument against "profit maximization" is an argument against consumer welfare.

Maximizing consumer welfare is the ultimate justification for an economy.

"Consumer welfare" is just another way to say "wealth." So Professor Rubin is saying, correctly, that maximizing wealth is the justification for an economy, and it should be the goal of political economy. But I wish he and others defending free enterprise would make explicit that profits are good not only because they reflect efficient satisfaction of consumer demand, but also because they are the mirror-image of the "profit" or wealth-improvement that everyone else who dealt with the company must have realized in order for the profit to occur. Profits are good because they expand wealth, make the pie bigger, and destroy poverty. They are the source of the torrent of prosperity that gushes when markets are free to operate.

By calling into question the good of profits, President Obama declares war on prosperity, as he has for the last four years. Is he winning that war? Look around you. And then decide whether you would rather live in prosperous country that blesses the profit-maker, or a destitute country that snipes at him.

More from AEI President Arthur Brooks

2012-05-15T21:22:00.000-04:00

I earlier posted about a speech given by American Enterprise Institute President Arthur Brooks. Brooks has written a book, The Road to Freedom, elaborating on the theme of his speech, which is the moral imperative of free enterprise. That point is worth repeating: Free enterprise is desirable because it is fairer, not just more efficient, than other economic regimes. Brooks is blogging here, and he has much to say about why free enterprise must be defended against government overreach. A sample from his book:

In his first inaugural address, Thomas Jefferson laid out his vision of “a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.”

President Obama’s vision of government is a bit more expansive than Jefferson’s. The U.S. government, in his view, should be judged on whether or not “it helps families find jobs at a decent wage, health care they can afford, a retirement that is dignified.” In a bit over 200 years, we have moved from a president who believes the purpose of government is to leave you free to live your life as you see fit, to a president who thinks that the state is included in finding you a job, getting you a doctor, ensuring you save for your retirement, and a long list of other things.

We need a philosophy of government that preserves Jefferson’s ethos, while recognizing that the world has changed in dramatic ways. In my view, America would do well to turn to the wisdom of German-born economist and Nobel laureate Friedrich Hayek. Hayek’s classic book “The Road to Serfdom,” written in 1944, is obligatory reading for all advocates of free enterprise — and still provides an excellent guide to the role of government.

More power to him.

More on The Rational Optimist

2012-03-01T22:53:00.000-05:00

One more thing about Matt Ridley's book, The Rational Optimist: Ridley also makes the point I make here that liberty and prosperity feed off of each other, that the more of one, the more of the other. Ridley points out that the intelligentsia despise free markets and those who get rich as immoral, but trade, free markets and wealth-creation have done more to foster equanimity in class relations and world peace than anything else.

It is almost an axiom of modern debate that free exchange encourages and demands selfishness, whereas people were kinder and gentler before their lives were commercialized, that putting a price on everything has fragmented society and cheapened souls. Perhaps this lies behind the extraordinarily widespread view that commerce is immoral, lucre filthy and that modern people are good despite being enmeshed in markets rather than because of it. . . .

* * *

But both the premise and the conclusion are wrong. The notion that the market is a necessary evil, which allows people to be wealthy enough to offset its corrosive drawbacks, is wide of the mark. In market societies, if you get a reputation for unfairness, people will not deal with you. In places where traditional, honour-based feudal societies gave way to commercial, prudence-based economies--say, Italy in 1400, Scotland in 1700, Japan in 1945--the effect is civilising, not coarsening. . . . Voltaire pointed out that people who would otherwise have tried to kill each other for worshipping the wrong god were civil when they met on the floor of the Exchange in London. David Hume thought commerce 'rather favourable to liberty, and has a natural tendency to preserve, if not produce a free government' and that 'nothing is more favourable to the rise of politeness and learning, than a number of neighbouring and independent states, connected together by commerce and policy.'

As Ridley concludes:

The lesson of the last two centuries is that liberty and welfare march hand in hand with prosperity and trade. Countries that lose their liberty to tyrants today, through military coups, are generally experiencing falling per capita income at an average rate of 1.4 percent at the time--just as it was falling per capita income that helped turn Russia, Germany and Japan into dictatorships between the two world wars.

I'm Not Crazy

2012-03-01T22:28:00.001-05:00

Most of the ideas I have expressed in this blog have been "original" in the sense that I thought of them, largely without doing a lot of research, but admittedly "unoriginal" in the sense that I knew that others must have already thought of them. Even though these ideas are not original, I thought it important to remind ourselves of them, in a time when the fundamental principles that made America the freest and most prosperous country in the world are daily under attack.

Still, I thought, if the principles I enunciate are true they must have been announced by authoritative economists before now. As I said in my first substantive post, it must be an "iron law" of economics that "Every voluntary transaction between traders in a fair market provides to each trader more wealth after the transaction than he or she had before." But I couldn't find where that law had been stated, so I called it "Pammachius's Law." Unless I was crazy, though, it must really be someone else's law.

I'm glad to say, due to the helpful reference of a very good friend, I'm not crazy: I have found a book that makes many of the same points that I do, but citing the great economists as it goes. That book is The Rational Optimist: How Prosperity Evolves, by Matt Ridley. Ridley makes several excellent points about how trade fundamentally shaped human evolution, that we are who we are because at some point humans stopped trying to do everything for themselves--finding all their own food, making their own tools, building their own shelters, making their own clothes--and instead started to trade for these things, allowing them to exponentially increase their wealth, longevity, security, free time and intelligence.

In the course of making these points, however, Ridley reminds us of some fundamental economic truths.
One of those truths, I am glad to say, is that Trade Creates Wealth, and it is known in economics as Ricardo's Law. To be sure, David Ricardo did not state his Law in those words; rather, his focus was on the notion of comparative advantage, or the insight that trade happens when one person has an advantage in making or doing something and can produce it comparatively more cheaply than someone else can produce it for himself. But this is the same thing as Trade Creates Wealth. As Ridley writes, hypothesizing about caveman traders:

Suppose Adam is a clumsy fool, who breaks half his hooks, but he is an even clumsier fisherman who cannot throw a line to save his life. Oz, meanwhile, is one of those irritating paragons who can whittle a bone hook with little trouble and always catches lots of fish. Yet it still pays Oz to get his hooks made for him by clumsy Adam. Why? Because with practise Adam has at least become better at making hooks than he is at fishing. It takes him three hours to make a hook, but four hours to catch a fish. Oz takes only an hour to catch a fish, but good as he is he still needs two hours to make a hook. So if each is self-sufficient, then Oz works for three hours (two to make the hook and one to catch the fish), while Adam works for seven hours (three to make the hook and four to catch a fish). If Oz catches two fish and swaps one for a hook from Adam, he only has to work two hours. If Adam makes two hooks and use one to buy a fish from Oz, he only works for six hours. Both are better off than when they were self-sufficient. Both have gained an hour of leisure time.

I have done nothing here but retell, in Stone Age terms, the notion of comparative advantage as defined by the stockbroker David Ricardo in 1817.

* * *

Ricardo's law has been called the only proposition in the whole of the social sciences that is both true and surprising. It is such an elegant idea that it is hard to believe that Paleolithic people took so long to stumble upon it (or economists to define it).

(Emphasis added.) Ridley goes on to show, as I have, that "Trade Creates Wealth" means voluntary transactions make the pie bigger:

A successful transaction between two people--a sale and purchase--should benefit both. If it benefits one and not the other, it is exploitation, and it does nothing to raise the standard of living. The history of human prosperity, as Robert Wright has argued, lies in the repeated discovery of non-zero-sum bargains that benefit both sides. Like Portia's mercy in The Merchant of Venice, exchange is 'twice blest: it blesseth him that gives and him that takes.' That's the Indian rope trick by which the world gets rich. Yet it takes only a few sidelong glances at your fellow human beings to realise that remarkably few people think this way. Zero-sum thinking dominates the popular discourse, whether in debates about trade or in complaints about service providers. . . . Michael Shermer thinks that is because most of the Stone Age transactions rarely benefited both sides: 'during our evolutionary tenure, we lived in a zero-sum (win-lose) world, in which one person's gain meant another person's loss.'

That is a shame, because the zero-sum mistake was what made so many -isms of past centuries so wrong. Mercantilism said that exports made you rich and imports made you poor, a fallacy mocked by Adam Smith when he pointed out that Britain selling durable hardware to France in exchange for perishable wine was a missed opportunity to achieve the 'incredible augmentation of the pots and pans of the country.' Marxism said that capitalists got rich because workers got poor, another fallacy. In the film Wall Street, the fictional Gordon Gekko not only says that greed is good; he also adds that it's a zero-sum game where somebody wins and somebody loses. He is not necessarily wrong about some speculative markets in capital and assets, but he is about markets in goods and services. The notion of synergy, of both sides benefiting, just does not seem to come naturally to people.

So not only am I not crazy for positing these ideas--they are well recognized by learned economists--I am also not crazy for believing these truths are not well understood. They need to be understood, discussed and defended, by politicians, academics, mediaites, and people everywhere, because they are at the core of American liberty and prosperity. When radicals who "occupy" this or that claim that the "1%" should be divested of their wealth, through higher taxes, because they have more wealth than others, they start from the false premise that the "1%" got richer because they made others poorer--a zero-sum fallacy. To the contrary, the 1% got rich only by making others wealthier, too. Taking away their wealth and redistributing it destroys wealth, a "negative-sum" game.

Do you doubt "the poor" get richer when they trade with "the rich"? You shouldn't. Here's hard proof: Since 1990, a time of hugely increased world trade and globalization, the number of people living in extreme poverty in the world was cut in half, according to this Wall Street Journal article. Who got poorer if the poorest of the poor got richer? No one, of course. The pie just got bigger. It's not a zero-sum economy. Hallelujah.