Rise of Reason has been a bit quiet lately as I have been fairly busy with business and applying to graduate schools. However, I’m dedicating more time to spreading the value of freedom!
I am curious to know if there is anything any of you want to see an article about. If there is anything in particular please comment on this article. Thank you!
-JPA
In a recent Huffington Post article, film critic Marshall Fine veritably gushes over Michael Moore’s latest diatribe, Capitalism: A Love Story, calling it “an urgently important piece of work.” The film’s grievances are legitimate and even admirable. Its conclusions and central premise however, are critically flawed.
Michael Moore pinpoints the problem as “two Americas – and most of us are living in the one that routinely gets the short end of the stick. Why? Because that other America – the one in which the bulk of the country’s wealth is owned by the richest one percent of Americans – is so firmly committed to hanging on to what they’ve got and getting more.”
On this point, few Americans would disagree, including myself and certainly including the oft-derided “tea party” movement, which turned out in droves to protest the transfer of billions of dollars of wealth from ordinary citizens in the “short-end-of-the-stick America” to wealthy corporate interests in the “richest-one-percent America.”
But Michael Moore’s analysis of this problem’s root causes is shallow, unsophisticated, and inaccurate. Why are there two such Americas? Because, Moore argues, the Reagan and Bush Administrations “did so much to deregulate and destabilize our economy in the name of the free market.”
Capitalism, as the film’s title suggests, is the culprit and the target of Michael Moore’s misguided polemics. The free market is the problem and more government regulation is the solution. This common line of thought and rhetoric is so tragic not merely because it is mistaken, but because the mistake is predicated on a fundamental misunderstanding of capitalism itself.
Let’s look again at the picture of the two Americas. Let’s call the bad guys Corporate America and their victims Middle America, because they are middle-to-lower class and often caught in the middle between special corporate interests and a corrupt government that rewards and aids those interests in their fleecing of Middle Americans.
How does Corporate America exercise its power and tyranny over Middle America? Moore points it out himself. One of his biggest grievances against corporate America in Capitalism: A Love Story is the seven hundred billion dollar bailout Wall Street received from the government.
Indeed, Moore’s distributor, Overture Films says that Capitalism: A Love Story chronicles what Moore considers “the biggest robbery in the history of this country the massive transfer of U.S. taxpayer money to private financial institutions.” Watch the trailer yourself and see how central the billion dollar corporate bailout is to Moore’s outrage and criticism.
Then remember that capitalism and free markets are based on no interference from the government. In a system of perfect capitalism, the bailouts would not have occurred. Indeed their very occurrence immediately precludes our system of economics from being considered capitalistic. It is not because our economy was so free and unregulated that this occurred, but because our government is allowed to become so involved in our economy.
In a free market, businesses succeed and fail on the basis of their ideas, on their merit in creating value for society. This is determined by the free and voluntary activity of individuals who exchange with others- again, on the basis of what improves and adds value to their lives. In this model, businesses that don’t create value for others… fail.
But in a controlled economy, the government decides who the winners and losers are irrespective of the value they create. In this case, failing businesses which should lose, get propped up as “winners” by the government, with money that is taken by the government, from taxpayers in Middle America, without their free and voluntary consent.
See who the culprit really is? Yes: the government. If the government were restricted to its Constitutionally enumerated powers (minus two centuries of a lot of case law and its many bizarre interpretations thereof), the bailouts would never have occurred. If America were a truly capitalist country, then the government would not be allowed to intervene by taking your wealth and transferring it to businesses that did not merit it.
If you can clearly and emotionally explain to others what I have written above, while vehemently agreeing with them as you should, that the corporations in America are way out of hand in their scope of power and influence, then we may be able to resolve a deep episode of polarization in American history that should never have happened.
For Michael Moore’s fans on “the left” to so deeply resent and abhor the government’s intrusive corporate bailouts, is an encouraging sign and a bright opportunity to clarify what the nature of capitalism and the proper role of government really are. With a little encouragement and clarity from free market proponents, we may yet see the rise of reason in 21st century American politics.
W. E. Messamore blogs at The Humble Libertarian.
Over the weekend the Obama Administration effectively fired the CEO of GM, Rick Wagoner, and much of the GM board. This would not be much to report had the common stockholders of GM voted to replace members of the board and those new members then voted to terminate Mr. Wagoner; it would actually be almost expected and applauded by most. However, this story becomes very newsworthy as it is the first time that the United States Government, namely the Obama Administration, has effectively fired a member of the private sector.
Due to TARP, the United States Government owns a large share of a number of major U.S. corporations, a gigantic leap in the direction of Socialism. However, until recently the Government has led us (the citizens) to believe that it would not meddle in the affairs of these private organizations, but rather it would simply be a silent investor in them in some horrible attempt to calm the economic volatility. The Government’s stance as a silent investor, however, has rapidly eroded and developed into the role of an activist investor that even Carl Icahn would envy. The United States Government has capped executive income ($500k per annum), capped executive bonuses (1/3 of annual salary or $167k), is attempting to tax any bonus paid to a family earning more than $250k per annum at a 90% rate, restricted the marketing practices of a number of companies (most notably not allowing Bank of America to sponsor the new Yankees Stadium), and now deciding who should is worthy or unworthy to be a CEO or board member of private companies.
The members of Congress and the Obama Administration seem to believe that they are more fit to run private companies than anyone else in this nation. A few months ago we were led to believe that we must bailout the domestic automobile manufacturers in order for them to avoid bankruptcy (see my article on this topic). The Government, in all its wisdom, has now decided that the only way out for these very companies to restructure and survive is to go the route of bankruptcy — this only after handing them billions upon billions of dollars in tax payer cash!
We are on a collision course with socialism at an incredible rate. I’d usually offer a relatively simple solution here, but given the above absurdities offered to us by our Government, I think that the solution is more than apparent.
Update:
It should be noted that President Obama has explicitly given GM sixty days to completely restructure and Chrysler thirty days or both firms will be forced into bankruptcy by the United States Government. Obama has demanded, as an activist investor/chairman of the board might, that Chrysler merge with European automobile manufacturer, Fiat, within the next thirty days. In addition, the Obama Administration is now insisting that members of the United Auto Workers Union give bigger concessions than they had previously been willing to give and that holders of GM debt agree to take a steep discount on that debt and could be required to convert it to GM stock.
Again, this would be fine and well if a private equity group purchased a good chunk of one of these companies then demanded changes be made – it is the legal way of doing things in this nation. However, in this circumstance we have the Federal Government not only intervening in the private markets, but completely controlling them. President Obama commandeered complete control of General Motors and Chrysler and that should not sit well with the American people. What happened to our guarantee of Life, Liberty, and the Pursuit of Happiness?
Imagine an America where contracts were only valid so long as the political winds out of the District of Columbia blew in the right direction: a world where the government could circumvent any contract that attracted the ire of politicians, or that politicians could use to redirect attention from their own failings. In such an uncertain world, who among us would put any faith in contracts, and who among us would be willing to put our livelihoods at risk on the basis that the government would protect our interests?
As uncertain as free markets may seem, certainty is one of the bedrocks of a free market system. A free market can only thrive in a moral society (note: “moral” here not necessarily in the sense of a religious morality), governed by a legal framework which establishes certainty in economic transactions. Certainty is then derived from the laws being enforced by a governing body with the authority to use force in order to enforce the rule of law, which ideally is a direct reflection of agreed upon social mores. As long as outcomes within the rule of law are known, a free market economy can then function, and market participants are able to speculate about the unknown, with known legal outcomes upon the outcome of the unknown.
We speculate every day. One such speculation that we all experience in our lives is the speculation about our worth in the workplace. As employees, we believe that our services have value, and we demand to be paid for the value of our services. We know that we will do our best and that we will provide value to the company, but the prospective employer can’t possibly know what type of employee we will turn out to be. When we agree to work for a company, we take on some amount of risk: what if the person offering us a job has lied to us about how much we will be paid? What if our job will be different than described during the interview process? On the flip side, the employer also has risks: What if the employee doesn’t work the full time for which he is paid? What if the employee is dishonest and steals from the company?
To solve these issues and to help mitigate risks associated with employment, the employer and employee enter into a contract. The employer specifies salary and job requirements, and the employee agrees to perform services in a manner as defined by the employer. Both sides gain some amount of certainty from having agreed to a contract.
Employment, like all contracts, can only exist in a moral society with a well-defined rule of law, and here is why: If no social mores exist by which the majority of people function, neither party will trust that the other party will perform on the contract, yielding the contract ineffective on its face. A rule of law cannot compensate for a lack of social mores, because adjudicating contracts is not costless – someone must pay for attorneys, judges, court clerks, courthouses, officers of the court to enforce judgments, etc. At the margins, people will not enter into contracts if they believe they will have to resort to the legal system to resolve a dispute, because they cannot afford the very real costs of having an issue adjudicated. Without morality, the odds of reliance on the legal system increase. However, in a moral society, the rule of law ensures that the few who do not abide by social mores will be forced to comply, and, thus, odds are that contracts will be honored sans adjudication. Both morality and rule of law are necessary, but individually insufficient conditions to ensure a proper framework for contracts to exist.
Recently, there has been much ado about the bonuses given to AIG executives: bonuses that were contractually agreed upon by both AIG and the individuals who were given bonuses. These were not, by all accounts, discretionary bonuses that AIG lavished upon these executives, but contractually owed bonuses of a specified amount, which AIG could not legally alter. To be sure, AIG didn’t pay these executives in excess of what surely was a guaranteed minimum bonus. Most likely, AIG had discretion to pay these executives more than the minimum, but, given the performance of the company, AIG did not pay in excess of the bare minimum.
For the past few days, the news media has not been able to stop covering these bonuses. In fact, the news media continues to beat the war drum against these “greedy” executives, all but demanding that something be done about these “outrageous” bonuses. Fox News’ Greta Van Susteren, who is… ahem … a lawyer, vows to “get to the bottom” of how we let these bonuses be paid. I guess the fact that these are contractually owed bonuses eludes this lawyer.
It is our own greed and envy that outrages us about these bonuses. What’s worse is that, because we, as taxpayers, have taken 80% ownership in AIG, we feel that we have the right to control the company and demand that these bonuses not be paid. We feel a certain amount, and rightfully so, of righteous indignation that our tax dollars are going to pay the bonuses of people who were involved in running AIG into the ground, but our greed and envy are distracting our attention from the people who are truly deserving of our ire. In fact, one might think that politicians are intentionally calling our attention to these trivial bonuses, which account for less than one-tenth of one percent of the money allotted to AIG, so that we will not focus on the fact that the government is busily spending us into debt and circumventing laws that were established to keep us all safe from the government intervening in our lives.
We should be angry at the politicians who bailed out a company so wrought with mismanagement, not at the company or at the executives who received these bonuses. The free market allows for failure: in fact, failure is like a disease that causes illness but eventually is fought off by the body, which then has antibodies to fight the disease in the future. When the government intervenes, it causes the same problems caused by the over-prescription of antibiotics, which causes the disease to mutate such that fighting it off in the future becomes ever more difficult. Our anger should be focused on the very politicians who are distracting us by pointing to some trivial amount of money given out as bonuses.
We should be even more angry at politicians who speak of finding “legal avenues” to circumvent the rule of law. If even one private contract is circumvented by the government, then all contracts are at risk of being impaired by the government. Our greed and envy may lead us to believe that it’s right to punish these few individuals who received more money than most Americans will see in a lifetime as a bonus for a single year’s work, especially when that work resulted in laying the groundwork for the company’s failure, but we must remember that the rule of law is essential to a properly functioning economy, and that we wouldn’t want the government interfering in our contracts.
What if, for example, the government decided that non-hybrid vehicles are not being sold at a price that politicians feel accounts for the social costs of those cars and increases the amount you, as a non-hybrid car owner, owe for the car? “Absurd!” you say “The government can’t do that!”
Oh, but they can. What if anyone who owns a non-hybrid car suddenly becomes subject to a new tax for non-hybrid car ownership – even if you purchased the car 10 years ago? You might think this was unfair; that had you known this when you were purchasing a car, you might not have purchased the car. You’d probably think it was unfair that the government passed this law after you purchased the car.
You’d be right to be upset, because this is exactly what the Constitution attempts to avoid in Article I, Section 9 where it states, “No bill of attainder or ex post facto Law shall be passed.” Such a tax would, de facto, be an ex post facto law. Such laws are unconstitutional.
Well, what of the solution that Congress is discussing to “rectify” the AIG situation? Senate Banking Committee Chairman Chris Dodd (D-Conn.) has recommended levying a draconian and confiscatory tax aimed at only AIG executives who received this bonus. Such a tax, so directed at these specific individuals for the sole purpose of circumventing a legally valid and binding contract is, de facto, and ex post facto law. We, as Americans, no matter how disgusted we are by the fact that we are bailing out AIG, cannot stand for the government violating the Constitution to enforce some notion of cosmic justice, because it undermines the very principles upon which the country was founded, and which allow our free market economy to function.
We are moving toward living in an ex post facto world: a world where we address symptoms rather than illnesses; a world where the rule of law changes on a daily basis based on how we feel about outcomes rather than a world where we enforce a rule of law established to make sure everyone plays by the same rules. Such a world is not only an ex post facto world, but an ad hoc world, malleable by the political process, changing daily, and wholly unstable to support a free market economy.
We are being persuaded, both by our politicians and the media, to focus on outcomes, which are mere symptoms of the underlying illnesses causing them. Too often the conversation about “equality” focuses on equality of outcomes, rather than equality of opportunity. We look at those things we see that make us feel wronged, and try to right them, instead of understanding what caused them in the first place. In AIG’s case, it was government intervention that allowed these bonuses to be made. Had the government allowed the rule of law – the system that ensures we all play by the same rules – to solve AIG’s financial woes, AIG would have entered into bankruptcy, ruled by bankruptcy law, and a judge could have legally invalidated the contracts for guaranteed bonuses, in favor of paying AIG’s debt holders and shareholders. Problem solved.
It is precisely government intervention in the free market that has caused this problem. Allowing the government to fix the problem by circumventing private contracts and directly violating the Constitution only creates systemic problems that will certainly cause more problems in the future, because it will create an ex post facto world, and an ex post facto economy.
One of the greatest lessons of economics that is simple, yet so often misunderstood, is something that Art Laffer put to me very succinctly: “Whatever you tax, you get less of.”
In general, people seem to understand this.
We tax cigarettes because, at the margins, less people will smoke if smoking costs more. We, as a society, recognize that smoking will cause death; however, even though we know that every cigarette marginally diminishes the smoker’s health, we don’t criminalize smoking. Instead, we just tax cigarettes in hopes that this “sin tax” will help to influence some people not to smoke. Of course, economists also recognize that the demand for cigarettes, especially to a nicotine-addicted person, is relatively inelastic, and therefore a cigarette tax is a good source of government revenue. However, demand elasticity aside, we do recognize that when we tax cigarettes, less cigarettes are smoked. Whatever you tax, you get less of.
When it comes to income, it would seem that people understand the concept, but their application of the concept isn’t well thought out.
Given the class warfare that seems to dominate today’s political conversations – and, with 5% of the population paying the bulk of the taxes, it’s politically expedient for politicians to promise the other 95% benefits at no cost to them, but for which the other 5% will be forced to pay – I think it’s safe to say that there is a fair amount of the “have nots” thinking that there are too few “haves” and too many “have nots” and that by increasing taxes on the “haves” we will simply get less “haves” and we will, to quote Barrack Obama, “level the playing field.” Oh, but that were true.
Here’s the problem with that line of thinking: Remember, whatever you tax, you get less of. What, exactly, are we taxing when we tax those “rich” people? Are we taxing their assets, or are we taxing their current year income? We tax current year income. So, what do we get less of? We get less high income earners.
In the short term, we get less high income earners because the government takes some of their earnings and redistributes it (through direct redistribution and indirect redistribution in the form of government operations and projects) to those who earned less income, giving a whole new definition to the term “unearned income”, as defined by the IRS currently anyway.
In the long term, we get less high income earners because people substitute away from those activities that earn higher incomes. Earning a lot of money is hard work: there’s greater responsibility, greater stress, greater risk, and more years of hard work on the front end to be able to take on everything that comes along with activities that generate more income. It’s far easier to earn less money: anyone can flip a burger. Also, dual income families where income is roughly equal between the husband and wife may decide that if they are going to lose 50% of their income to taxes, they would be better off having one of the two stay home, thus decreasing the output of the economy as a whole because less people are producing goods and services.
Now, the question is do we really want to have less high income earners? Is that really what those who want to level the playing field want? I posit that those who vote to level the playing field often think of people like Warren Buffet and Bill Gates as those who should contribute more in order to level the playing field.
I’ve got news for you: Warren Buffet and Bill Gates could both not earn a dime for the rest of their lives, not pay any income taxes, and live perfectly comfortable lives. In fact, they could not earn another dime and be wealthier the day they die than almost any other American. Why? Because they are wealthy today. What’s worse is that if we enacted high taxes, we would probably find that their wealth would increase compared to the rest of the population. If their relative wealth were to increase, that would be precisely the opposite of the “level the playing field” crowd’s goal. This is what we in economics refer to as secondary effects, or unintended consequences.
When we tax income, we just ensure that we have less high income earners. Let’s think about what that means; let’s examine the secondary effects.
Average Joe is a hardworking American. He has been working at a fast food chain since he was 16, and has worked his way up to a district manager. He’s 40 years old, making $65,000.00 per year, has a decent amount of debt like a lot of Americans, and he desperately wants to take his experience to open his own restaurant, but he needs to save around $250,000.00. Given that Joe is carrying about $30,000.00 of credit card debt, trying to save that money is difficult, and taking on even more debt in loans is a substantial risk at his age.
Joe has worked so hard over the years, and distinguished himself as such a stand-out in the organization, that he’s asked to take on a vice president role in the company. Joe will be paid a salary of $150,000.00 per year, with a bonus potential of 200% of his salary, depending on company performance. In his first year, Joe earns a 100% bonus, but is let go because of budget cutbacks in the organization.
Guess what: Joe is now rich. That’s right, according to the tax code, Joe is in the top 5% of income earners, and we’re going to tax him to level the playing field. Joe will probably pay well over $100,000.00 in taxes. Joe was finally getting to a point in life when he unloaded the burden of credit card debt that straps so many Americans, and he could have established a base of savings that would have begun to accrue interest so that interest was finally working for him. Joe could have used that savings towards starting his own restaurant, which would have employed more people and brought more diversity of restaurants to the community.
Joe’s hard work could have finally made him just barely self-sustaining and finally put him in the black, but because he’s now “rich”, he’s going to have to give a substantial amount of his earnings to Uncle Sam. So much for leveling the playing field. Now that he was finally getting to a point where he could start caching up to the truly wealthy, his tax burden is making it more difficult for him. We’re leveling the playing field by keeping Joe in relative poverty.
Meanwhile, Warren Buffet and Bill Gates will pay roughly $45,000.00 per $300,000.00 of income because their incomes come predominately in the form of dividends, interest, and long-term capital gains.
That’s right: the “income gap” between Average Joe and the Warren Buffets (net of tax) of the world is actually widening. The wealth gap is widening at an even faster pace because of the power of compounding interest. And, to make matters worse, people like Average Joe have an even more difficult time attaining the level of wealth of Buffet and Gates because the government classifies them as “rich” the second they actually are in a position to make their lives better and earn their way out of relative poverty.
By taxing the “rich”, so long as we classify rich as those who earn a lot of W-2 or 1099 income (for those not familiar with the tax system, these are “earned income” or wages as opposed to “unearned income” such as interest, dividends, and capital gains), we actually ensure that we get less rich people in the future. Those with wealth continue to have wealth, and those who aspire to become wealthy by working hard will be kept down by the tax system.
In the long term, less people will work towards the American Dream, because we will have taxed away the opportunity for those who would only be moderately successful in comparison to the few notables such as Henry Ford, Sam Walton, Bill Gates, Warren Buffet, and those whose work commands compensation on the order of magnitude the likes of which most Americans will likely never achieve. So, not only will we have made it more difficult to become wealthy, we will, at the margins, reduce the number of people who put in the necessary work to become wealthy, and that only reduces our production as a whole.
Whatever you tax, you get less of. If you tax high income, you’ll get less high income, and that will keep the wealthy wealthy, and the poor poor. Do we really want to level the playing field by forcing poverty on future generations?
I will be organizing a group of people to meet in the Phoenix, AZ area on March 18th to simply drink wine and discuss economics and politics. If you would be interested in attending please join the facebook group here or comment on this post.