Non Sequiturs on Parade – PART VIII

This is the next to last post about Steve Roth’s handy compilation of leftist bromides, non sequiturs, self-congratulations, and just plain ol’ errors, “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] The issue this series is addressing is: Did Roth’s reference to the Great Depression help explain why welfare and redistribution saves capitalism from itself? (Discussions of other instructive aspects of the article can be found in PART I, PART II, PART III, PART IV, PART V, PART VI, and PART VII.)

As his final effort to explain why “massive redistribution . . . saves capitalism. . .” (before waxing eloquent about the goodness of “massive redistribution”—something irrelevant to proving his claim), Roth recounts an infamous leftist myth:

“Or to put it another way, and bring it right home to America: The New Deal saved capitalism from itself. . . The New Deal showed that capitalist countries could overcome the “concentration” curse. Using a host of government programs, it resurrected the mighty American market engine from the depths of The Great Depression. . . .

How did that happen? The New Deal shared the wealth in manifold and diverse manners, using a plethora of government programs, rules, and institutions.”

Roth’s story is a myth – that is, “a traditional story, especially one concerning the early history of a people or explaining some natural or social phenomenon, and typically involving supernatural beings or events.” The supernatural hero of this historical story is FDR. “Roosevelt’s combination of confidence, optimism and political savvy – all of which came together in the experimental economic and social programs of the ‘New Deal’ – helped bring about the beginnings of a national recovery.”[ii] With his trusty pen, gift for fireside gab, intelligence, patrician can-do spirit, and faith in government and its experts, FDR banished Hooverism (“do-nothingism”) from the land and brought prosperity to the land.

Part of this story is a myth of the “widely held but false belief or idea” kind; i.e., it is epically incorrect. Hoover was a life-long advocate of active involvement by the government in the economy.

“Pulitzer-Prize winning historian David Kennedy summarized Hoover’s work in the 1920-21 recession this way: ‘No previous administration had moved so purposefully and so creatively in the face of an economic downturn. Hoover had definitively made the point that government should not stand by idly when confronted with economic difficulty.’[iii] (Harding, and later Coolidge, rejected most of Hoover’s ideas. This may well explain why the 1920-21 recession, as steep as it was, was fairly short, lasting 18 months.)”[iv]

Unlike Harding and Coolidge in 1920-21, Hoover did not stand idly by after the 1929 stock market crash.

“In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt’s advisers knew that Hoover had started the New Deal. One of them wrote, ‘When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself.’”[v]

Nevertheless, using the word “myth” with respect to the plausibly true aspects of the FDR’s New Deal saved the day story is somewhat of an overstatement. History, especially economic history, is subject to selection and interpretations of the facts that historians choose to emphasize or ignore in order to reach (usually preconceived and desired) conclusions. Certainly, a story weaving together factoids about what happened before, during, and after the Great Depression coupled with enough wishful thinking can be spun into a plausible history that appears to support Roth’s claim. Had Roth wanted to cite scholarly support for his interpretation (“myth”), he had an abundance of scholarly work from which to choose. (By “scholarly” I’m referring to work done by people who are legitimately considered to be scholars. Inasmuch as a scholar’s job includes disproving faulty work of other scholars, saying that a work is scholarly says nothing about whether the work is objective or true.) Much FDR hero worship is of recent vintage (that is to say, since the near universal rejection by economists in the 1970s of the Keynesian myth).[vi] There is also, however, an abundance of scholarly work that takes great exception to or outright rejects Roth’s narrative about the Great Depression. This includes the work of at least four Nobel laureate[vii] economists.[viii] The proper question for the critical thinker is, “Which version of history is the most credible?”

It should be noted in passing that, although it could never be proved, there may be some merit in the argument that FDR’s actions “saved America from socialism,”[ix] i.e., that FDR may have saved America from a revolution that would have resulted in outright socialism. That claim, however, would not have supported his thesis.[x] And neither does Roth make an argument similar to the one made by GWB when he said, “I’ve abandoned free market principles to save the free market system.” Bush thought that he was enabling capitalism to flourish later. Roth espouses a permanent abandonment of the free market principles as massively as possible without killing capitalism.

Let’s continue exploring Roth’s interpretation of New Deal history.

I suspect that everyone reading this has heard the New Deal “history” to which Roth referred. That story is told in the textbooks of schools and universities that are either part of the government or supported by and in symbiotic relationships with the government. Because those institutions comprise the vast majority of schools, essentially all textbooks tell that superficially plausible tale.

I also suspect that, unless you are particularly interested in history and economics, you have not heard much, if any, of why you should either doubt or reject that interpretation. Which interpretation is the more compelling interpretation?

After the stock market crash of 1929, a stark battle among scholars ensued as to what the government should do. The leading antagonists were John Maynard Keynes and Frederick Hayek.[xi] Keynes supported massive government spending and greater government involvement in and control over the economy. “Keynesianism” was opposed by many economists at the time and since. Keynes never became a Nobel laureate, but Hayek did. In addition to the four Nobel laureates mentioned above, many economists[xii] take great exception to or reject outright much of Keynesianism. After 50 years of studying the Great Depression, Keynesianism had been “fully discredited”[xiii] by the 1980s. (Why it has come back from the grave will be the topic of the next, possibly last, post on Roth’s article.)

It must be acknowledged that at least one Nobel laureate economist, Paul Krugman, disagrees with Friedman’s interpretation of the Great Depression history. In particular, Krugman claims Friedman is confused about the Great Depression[xiv]—while other scholars claim Krugman’s analysis is flawed.[xv] (For what it is worth, I believe that Krugman is a formerly great economist who is now willing to trade sound economics for fame and being part of the in crowd—and he possibly has some more worthy goals, e.g., placating the mob he believes will tear the whole thing down without massive redistribution. I’m not alone in believing Krugman’s punditry is not good economics.[xvi]) The thing to be noted, here, is that “the experts” do not agree about the supposed “lessons learned” from the Great Depression history.

As discussed in PART VII, Roth’s perpetual “massive redistribution” is not supported by Keynesianism—the ideas underlying the New Deal. Krugman puts it this way: “Although Keynes was by no means a leftist—he came to save capitalism, not to bury it—his theory said that free markets could not be counted on to provide full employment, creating a new rationale for large-scale government intervention in the economy.”[xvii] Keynes’s prescription was to medicate capitalism so that it could thrive when the economy was strong enough to let it; Roth’s prescription is to massively suck the life blood out of the body whenever possible.

Roth’s claim that perpetual “massive” spending saves capitalism from itself was also clearly rejected by Henry Morgenthau, FDR’s Treasury Secretary. After eight years of FDR’s attempts to pull the country out of its economic depression with spending, Morgenthau said in 1939:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot.”

In other words, the guy closest to FDR’s spending said that Roth’s citing of the Great Depression as support for his faith in spending is ill-founded.

We also know that, since 1880, the U.S. has experienced 27[xviii] economic panics and recessions, one of which was the “Great Recession” (starting in 2007) and one “Great Depression”[xix] (1929-1938). By my count, the Great Depression lasted 107 months, and the Great Recession 18 months (and by many people’s reckoning, about 10 years). Both of those events were accompanied by massive government involvement in the economy prior to and, at least in part, inducing the crash as well as massive efforts to fix the problem after the crash. Neither went well.

By contrast, the average recovery time for the other panics and recessions since 1980 is just over 14 months. Government efforts to fix the economic problems of those events were relatively much smaller. The recession following the much more massive crash of 1920 (caused primarily by soldiers not being able to find jobs when they returned from WWI) lasted only 18 months. Both believing in free markets, Presidents Harding and Coolidge did essentially nothing to turn the economy around—and kick-started the “Roaring Twenties.” (While Coolidge’s parsimonious fiscal policies facilitated healthy organic economic growth, the fairly young Federal Reserve, thinking its experts had things figured out, flooded the economy with currency that created bubbles that burst with the crash of 1929.[xx])

What is usually left out of the FDR story is that government “doing something” automatically has negative consequences and that the more things it does, the greater the negative consequences are. FDR infamously said, “It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.” On the surface, that comment makes sense. On the other hand, consider this comment from the perspective of a business executive. To launch a new venture or product, an executive must attempt to predict the future demand for it, cost of raw materials, labor, taxes, regulations. . . The more predictable the future is, the lower the risk of investing in the project and the higher probability capital can be raised to proceed. This is a difficult task when the government and the economy is relatively stable. It becomes near impossible when government is constantly failing and trying new “somethings.” “Regime Uncertainty”[xxi] always suppresses investment and growth. The more government activity there is, the more uncertainty. So, for a government’s “something” (much less, many “somethings” at once) to be net positive, its positive consequences must be greater than its negative consequences. When the government is messing with the economy, that becomes almost impossible to achieve. (And with many things being tried at once, it becomes nearly impossible for economists to figure out what worked and what didn’t.)

Macroeconomics (the “branch of the economics field that studies how the aggregate economy behaves”) is a wonderful science, chock full of fantastic insights. What economists know and theorize is astoundingly interesting and complex and often very useful in identifying what not to do. It is especially wonderful in conjuring theories as to what might be true and what might make things better. On the other hand, the sad truth is that truly understanding how the economy works and how to predict, prevent, or cure economic booms and busts is still beyond the grasp of humans—and may always be. The Great Moderation (1980-2007) indicated that humans are making progress in understanding some things about the economy, but the events leading up to the crash of 2007 indicate that humans are far from knowing enough to avoid economic disasters (and/or that humans cannot help themselves from making bad collective decisions when they do or could know better). Paul Romer, the Chief Economist and Senior Vice President of the World Bank, describes the current state of macroeconomics as “a math-obsessed pseudoscience.”[xxii]

We must realize, however, that even if economists did know exactly what the government should do, the government would neither follow the plan nor flawlessly implement it. No legislation relating to the economy is free of crony provisions (siphoning) to fund politicians’ campaign coffers or burnish politicians’ popularity back home and bureaucratic implementation and enforcement—mostly by self-interested, minimally motivated, and marginally competent administrators in one or multiple bloated agencies. What comes out the back end of this process usually bears only a vague resemblance to the economically advised plan—but it will have a title that sounds really good to a majority of voters (who know or understand only a tiny fraction of what the economists advised; Jonathan Gruber comes to mind).

We need not despair, however. As history has shown, economies recover whether or not the government “does something” in an attempt to fix a recession, though much of what the government has done made things worse than they needed to be. That is to say, for whatever reason, things tend to get better faster when governments do the precise opposite of what Roth suggests should be done, i.e., what FDR did.

By and large, the public is ignorant of the counterarguments and facts that reveal the extremely shaky ground on which Roth stands. That an uneducated public sees Roth as standing on terra firma when making fanciful claims about history is a testament to how our government institutions, especially our educational institutions, are failing the citizenry. Why that is the case will be addressed in the next part of this series and hopefully will add to the reasons to doubt Roth’s interpretation of history.

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[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii]FDR: The President Who Made America Into a Superpower.”

[iii] David M. Kennedy, Freedom From Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, p. 48.

[iv]Hoover’s Economic Policies.”

[v]Herbert Hoover: Father of the New Deal

[vi] “When the initial expenditures failed to eliminate unemployment and were followed by a sharp economic contraction in 1937-38, the theory of “secular stagnation” developed to justify a permanently high level of government spending. The economy had become mature, it was argued. Opportunities for investment had been largely exploited and no substantial new opportunities were likely to arise. Yet individuals would still want to save. Hence, it was essential for government to spend and run a perpetual deficit. The securities issued to finance the deficit would provide individuals with a way to accumulate savings while the government expenditures provided employment. This view has been thoroughly discredited by theoretical analysis and even more by actual experience, including the emergence of wholly new lines for private investment not dreamed of by the secular stagnationists.” Milton Friedman, Page 67 of “Capitalism and Freedom.” (If you find my writing interesting, you would be hard-pressed to find a more interesting book than “Capitalism and Freedom.”)

See also Paul Krugman’s confirmation that Keynesianism had been discredited (“fell into disfavor”) among economists. “And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.” [Emphasis added.]

See also Christina Romer (an economist who believes the multiplier of “stimulus spending” is greater than 1—she’s a leftist who supports high levels of government involvement in the economy), who warned policymakers to learn “The lessons of 1937.” While I believe some of the lessons she learned from 1937 just ain’t so, she concluded (relying heavily on Milton Friedman and Anna Schwartz) that the federal government made two large mistakes in 1937 that extended the depression—i.e., that the government action hurt more than it helped.

Robert Lucas and Thomas Sargent referred to “the spectacular failure of the Keynesian models in the 1970s.”

[vii] This is not to suggest the Nobel committee always make sound judgments. The Nobel committee (like all committees, institutions, and governments) is comprised of fallible humans. It is only to suggest that the views I am urging are not from tinfoil hat rabble rousers.

[viii] Friedrich August Hayek (“Road to Serfdom”), Milton Friedman (see endnote vi), Vernon Smith (“Now, everyone believes we got out of the Great Depression because of Second-World-War spending. That’s the common explanation. And many economists have studied the effect of deficit financing on the recovery, but it’s basically ineffective”), and James Buchanan (“…by employing deficit spending and increased state intervention President Obama will ultimately hamper the long-term growth potential of the US economy and may risk delaying full economic recovery by several years”) clearly believed that the statement that “FDR saved the economy” with spending and involvement in the economy is false.

Although I did not find a discussion of George Stigler’s views about the history of the Great Depression, he “published ‘The Theory of Economic Regulation,’ in which he argued that regulation generally arises from the self-interested political activity of organizations that desire to be regulated. That seminal essay triggered a major research program in the economics of regulation.” Based on this statement alone, one could reasonably conclude that he did not believe FDR was the hero of any story.

While I have not found anything directly on point with respect to Gary Becker (a friend, colleague, and coauthor with Friedman) or Thomas Sargent (known for his “rational expectations”—a virtual impossibility when government is constantly changing the rules and imposing new policies as FDR did), there is good reason, based on what I have found, to believe that they do not buy into the argument that Keynesian economics saved the day during the Great Depression.

[ix]Discovery – A Memoir” by Vernon Smith

[x] “Saving the country from socialism” should not be confused with the possibility that what FDR did was economically advantageous. To illustrate, assume that the Fed, Hoover, and FDR policies were economically disadvantageous (e.g., turned what would have been a run-of-the-mill recession following a bust into the Great Depression—which I, and many people who are wiser and more learned than me, believe was the case), but were necessary to subdue the collectivist belief of the vast majority of the economically illiterate public that the governments must “do something” (to put down a revolt). In other words, assume that the New Deal suppressed growth in everyone’s standard of living, but also prevented a revolution. That the New Deal policies saved the country from succumbing to even worse policies that the mob would have imposed does not support Roth’s suggestion that massive redistribution improves the economy.

[xi]Fear the Boom and Bust: Keynes vs. Hayek Rap Battle

[xii] Thomas Sowell, Walter Williams, Robert P. Murphy, Robert Higgs, Stephen Davies, Alex Tabarrok, and Michael Munger.

Mike Munger’s comments in an interview on the subject are particularly compelling:

FRANK STASIO: If the government stimulates the economy though, through spending programs, doesn’t that create, doesn’t that generate wealth, doesn’t that generate money that can be circulated through the system and then ultimately strengthen the economy?

MICHAEL MUNGER: “The problem with that reasoning, and it could be true, but it just isn’t necessarily true. The problem with that reasoning is something that I’ve called, I’ve said that US Policy is daft, and what I mean by daft is that deficits are future taxes, and so what we see is that government spending that is deficit financed. We’re taking money, either from current tax payers, or worse from future tax payers who have no voice in it, and we’re spending it. The question is what are we spending it on? Well, if we are spending it on current services so that we are not actually paying for the amount of services that we’re getting, that’s not going to create growth, that’s not going to create jobs. All it is, is a drag on future generations. What we are not doing is spending it on infrastructures, railroads, education. If we were doing those things then yes, perhaps it would create jobs over the long term.”

[xiii] See endnote vi.

[xiv]Who Was Milton Friedman?”

[xv]Did Krugman Catch a Contradiction in Friedman’s Great Depression Work?

[xvi] Richard Posner (someone with whom I disagree on many things) says this of Krugman: “It really demeans the profession. Krugman is obviously a good economist. He’s got this book, “The Return of Depression Economics.” It’s very good… But his column for The New York Times is really irresponsible, nasty. Sometimes on his blog he makes accusations. In one of his columns, he suggested that conservatives were traitorous. He used the word “treason.” I’m bothered by that. If you have a very politicized academic profession, you lose your confidence in their objectivity.”

[xvii]Who Was Milton Friedman?”

[xviii]List of recessions in the United States

[xix] Some, including the current Wikipedia page (see endnote xviii), claim that the economic crash of 1920 was a “depression.” The decline in employment and the GDP was certainly much greater than during the Great Depression. Myself and others, however, classify it as a “recession” because of its short (18 month) duration and the extended boom (the “Roaring Twenties”) that followed (which contrasts sharply with the Great Depression and the Great Recession).

Some, including the current Wikipedia page, say that the Great Depression lasted from 1929 until 1933, followed by a recession in 1937-38. Others, including me, say it lasted about 10 years, starting in 1929. The Wikipedia page also says that the Great Recession lasted only 18 months. While I have accepted that, many people who lived through it are still feeling its lasting effects, and growth has been languid so far.

[xx]What Caused The Great Depression? | Lawrence W. Reed and Stefan Molyneux

[xxi]Regime Uncertainty—Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War.”

[xxii]World Bank’s chief economist Romer says macroeconomics in trouble.”

More On Two Paths for America

Author’s Note: A year ago today in the midst of the presidential campaign,[i] I posted the comment below on Facebook. I’m reposting it (with slight edits and insertions of citations) here because it extends my remarks in an earlier blog post, “Two Paths for America,” and it is relevant to the discussion of Steve Roth’s article. Though I did not specifically mention it in last year’s post, “massive redistribution” is part and parcel of “Option B” as described below. As will become obvious, I believe “Option A” is more beneficial to the poor than “Option B” (Despite the fact that while Option A will make them wealthier than Option B, it will not necessarily make the poor happier. (See “Wealth Creation. No Happiness, Why Bother?”)

Which would you choose if you had the following choices?

  1. The purchasing power of the bottom 75% of American households increases by 20% – 40% over the next ten years, but the purchasing power of the top 25% of American households increases by 30% – 50% over that period; or
  2. The purchasing power of the bottom 75% of American households decreases by 0% – 10% over the next ten years, but the purchasing power of the top 25% of American households decreases by 20% or more over that period?

Economic policies Americans demand their politicians adopt will head the country either more toward Option A or toward Option B. The exact numbers are impossible to predict but the above alternatives fairly illustrate the different effects between policies of free markets, light regulation and light taxation (Option A) and policies of trade barriers and other crony capitalism, heavy regulations and “soak the rich” policies (Option B).

Politicians and their symbiotic companions in academia want Americans to believe that income inequality is the ultimate bad outcome (did you ever wonder why the average inflation adjusted incomes of private university professors are $21,000 more today than they were in 1985? Are the students really getting a 30% higher quality of education today than they were in 1985? Surely the salaries of professors who are called upon by politicians to support what the politicians want to do have far outpaced the salaries of average professors). While it is true income inequality produces some negative consequences, it is also true that income inequality is the outcome of policies and processes that produce the greatest gains for the poor and middle income people over time.[ii] Politicians want Americans to believe Option B is the best approach so they can gain more power (via new laws, regulations, and selective enforcement), dispense more favors to friends (crony capitalism – which makes some people rich, thereby giving those rich people the funds and motivation to fill politicians’ campaign coffers – Solyndra anyone?)[iii] and spend more money (more tax revenue). The fact Option B slows the improvement in the standards of living of lower and middle income people is a price politicians are willing to impose on others in order to gain the benefits to them of Option B.

For the sake of brevity, I will spare you the details here, but the simple, but apparently not obvious, reality is that income inequality is the engine of prosperity. The greater the inequality, the higher the horsepower of the engine, i.e., the faster the acceleration of prosperity. Of course, the engine will not operate properly unless certain other conditions exist (Deirdre McCloskey’s works in this area are excellent).[iv] But the primary reason people get out of bed, go to work and be creative and productive is that the rewards for doing so improves the prospects for them and their families of having a better life than if they were to stay in bed. In general, the greater the rewards from working, the more people will work. [A serendipitous benefit of more work is that work is the process of a person voluntarily doing something to serve the wants and/or needs of others.]

Don’t believe me that the poor and low income people are helped the most? Compare the quantity and quality of what poor and low income people consume today compared to what they consumed in 1916 when there were only a handful of billionaires (if the wealth they had were converted to today’s dollars). The fact that the poorest American can walk into any hospital and get medical care that actually heals is a lifesaving difference for millions. That most of our poor are housed, overweight, air conditioned, astoundingly entertained by cable TV and unlimited access to knowledge and the world through the computers at the library (if not at home) are also tell-tale signs of how the consumption by the poor has improved vastly over time. Look also at the vastly greater amount and percentage of taxes paid by the top 10% today than then. Much of those tax dollars go to poverty programs. The lives of the wealthy have improved vastly also,[v] but middle and some lower income people now travel in the same kind of planes as all but the extremely top income people do and arrive at the destination only a few seconds later. In 1916, all but the very rich pretty much stayed in their village.

Option B has been BHO’s general approach to economic policies. He claims he sacrifices growth as a matter of fairness.[vi] We are experiencing the second slowest recovery from a recession ever as a result. [The slowest recovery ever was during the great depression when Hoover and FDR implemented Option B even more vigorously than BHO has.] Sadly, Option B will likely be America’s policy choice going forward because it is the general approach espoused by both Hillary and Trump. Hillary espouses Option B pretty much exclusively, and some of Trump’s policies are more in line with Option A, but some of his policies are full blown Option B.

Gary Johnson’s policies are almost exclusively Option A.

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[i] The Facebook post was elaborating on other Facebook posts urging people to vote for the flawed Gary Johnson because his policies were less flawed than those of Trump and Hillary.

[ii] See “Income Inequality Is More Than It is Cracked Up to Be.”

[iii] Consider also what happened under the TARP bailouts of Wall Street banks.

Matt Taibbi wrote a very readable summary, “Secrets and Lies of the Bailout” for Rolling Stone. “The extent of this “secret bailout” didn’t come out until November 2011, when Bloomberg Markets, which went to court to win the right to publish the data, detailed how the country’s biggest firms secretly received trillions in near-free money throughout the crisis. . . . ‘These megabanks still receive subsidies in the sense that they can borrow on the capital markets at a discount rate of 50 or 70 points [compared to smaller banks] because of the implicit view that these banks are Too Big to Fail,” says Sen. Brown.’ . . . All the big banks have paid back their TARP loans, while more than 300 smaller firms are still struggling to repay their bailout debts.”

The upshot is this: With TARP and Dodd Frank, the “too big to fail” banks received trillions of dollars of benefits from the government, became larger, and not only did the banks take no “haircuts” and get money at far below market rates, their officers and directors were not fired or otherwise required to share in the cost of all the damage their risky behavior inflicted on the country, but rather they were paid huge bonuses. All of this confirms to those bankers that the government will allow them to take huge risks and collect huge rewards of if the risks pay off and bear no negative consequences if the risks result in failure.

Another consequence is Wall Street is the source of a very noticeable percentage of political campaign contributions. See, “Wall Street Spent $2 Billion Trying to Influence the 2016 Election.” There are, of course, the Wall Street speaking fees (Obama, Hillary and Bill Clinton) and contributions to the Clinton Foundation—as if those were the only ways money was funneled to the politically powerful. (Bill Clinton did not fly exclusively on the jet he owns.)

[iv] An example: “2017 Hayek Lecture | Manhattan Institute

[v] But not as much as one might assume, see, “Income Inequality — the Gap Is Not as Large as You May Think.”

[vi] See, “Obama: Let’s Raise Capital Gains Tax Even if Less Revenue- Fairness – You might be a Leftist…

Non Sequiturs on Parade – PART VII

Let’s start winding up the analysis Steve Roth’s handy compilation of leftist bromides, non-sequiturs, self-congratulations, and just plain ol’ errors, “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] The issue this series is addressing is: Did Roth explain why welfare and redistribution saves capitalism from itself? (Discussions of other instructive aspects of the article can be found in PART I, PART II, PART III, PART IV, PART V, and PART VI.)

As discussed in the previous parts of this series, the first third or so of Roth’s article did not attempt to explain “Why Welfare and Redistribution Saves Capitalism from Itself.” The attempt to do that began in the ninth paragraph of his article with:

“Then add an Econ 101 notion that is pretty much universally accepted, because it’s strongly supported by theory, empirics, and just plain sensible intuition: decreasing marginal propensity to spend. A poorer person is more likely to spend an extra dollar (in wealth or income) than a richer person. Because: the “utility” (or just benefit) purchased by that extra dollar is so much higher for the poorer person. The fourth ice cream cone, iPhone, or Lamborghini just isn’t as enjoyable as the first. So greater concentration into a few hands means less spending — in economic terms, lower “velocity,” or turnover, of wealth.”

Roth’s claim that an extra dollar is more valuable to a poor person than to a rich person is correct.[ii] It is also very likely true that if a massive amount of dollars were given to poor people, they would spend it more quickly than the money would be spent if it stayed in the pockets of the rich from whom it was taken. This is largely due to the fact that wealthier people tend to save/invest more of their income than poor people do. From these two factoids, Roth asserts a conclusion: “So greater concentration into a few hands means less spending — in economic terms, lower “velocity,” or turnover, of wealth.”

Eureka? What is “velocity of wealth?” And who ever said it was a good thing?

Starting a paragraph referring to Econ 101 and ending it with “in economic terms, lower ‘velocity,’ or turnover, of wealth” [emphasis added] is playing fast and loose with the facts. I Googled “velocity of wealth” and got only three pages of results—none of which were links to academic papers and one of which was another article by Roth. It is certainly not a topic addressed in Econ 101. “Velocity of money”[iii] (and money is not wealth[iv]) is a common term used in economics. (If you Google “velocity of money,” you could spend years reading the academic papers and articles on that subject.) Velocity of money is important and might be mentioned in Econ 101, but it is typically discussed in more advanced courses on money supply and monetary policy. By citing Econ 101 and “velocity of wealth” in the same paragraph, Roth appears to be trying to lend a patina of sophistication to an unsubstantiated and perhaps made up concept. His appeal to “sensible intuition” is comical. A main purpose of economics is to dispel people of the foolish intuitions held by those who have neither an education in economics nor an “Economic Way of Thinking,” but believe their intuitions to be sensible.

To the extent that the velocity of money reflects a high level of trading (the realization of the wealth each party has created), a higher velocity of money is good. Do not be fooled, however, into believing that this fact means that a higher “velocity of wealth” going from the rich to the poor via force is a reflection of an economy working well. The fact that such velocity might effectively alleviate hardships might be good for the economies of the recipients or the souls of those who favor it proves nothing about its economic effectiveness overall—and Roth is attempting an economic argument.

In general, compared to voluntary wealth transfers, forcibly moving wealth from the rich to the poor tends to 1) enable the poor to consume more than they otherwise would—in the short run, 2) enable producers to sell more of their goods and services—presumably making more profit—in the short run, 3) reduce the incentives to produce wealth—so long as it persists, and 4) lessen the amount of research, discoveries, innovation, development, and production of new and better things. (Innovation delayed is innovation denied to those who die before the innovation is made.) Roth attempts to focus the reader on the short-run effects of wealth transfers and ignores both the current damage to the poor caused thereby and the long-term negative effects of wealth transfers on everyone—especially the long-term damage that wealth transfers do to the psyches and standard of living of the poor in the long run.[v]

There is much that is positive to be said for money moving from the rich to the poor, especially when done voluntarily (or by the inadvertent and unavoidable free flow of gushes of wealth from innovators and wealthy people to the poor[vi]—which some people call “trickle down”[vii]). (The poor in America have gone from being approximately equal to the poor everywhere in the world as of America’s founding to being in the top 1% or 2% of the wealthiest humans who have ever lived, and extremely little of that progress is attributable to anything done by the poor.) Good cases for taking from the rich and giving to the poor can be made based on caring and empathy. Note that Roth’s paragraph quoted above is not making that case. He is trying to make an economic case for taking from the rich and giving to the poor. Let’s sort out whether that paragraph gets the job done.

After the Econ 101 fiasco, Roth launches into a series of paragraphs that try to string together syllogisms to reach the conclusion that taking money from rich people and giving it to poor people is good for the economy. Roth’s theory is something like this: 1) Producers need people to spend money to buy their products, and 2) rich people do not spend as high a percentage of their cash on hand as poor people; therefore, taking from non-spenders and giving it to spenders prevents capitalist economies from “strangling” themselves due to people being insufficiently willing or able to buy enough. If such were the case, then one would have to conclude that the more massive the forced redistribution, the better off a country would be. (Roth neither suggests there is any limit of “massive distribution” beyond which things would get worse, nor that there even is such a limit.)

The argument has a strong Keynesian odor, but Roth seems not to realize that John Maynard Keynes[viii] prescribed government spending only in certain very specific circumstances that occur only occasionally. In simple terms, he theorized the existence of a vicious cycle in which: 1) “animal spirits”[ix] occasionally cause too many people to lose confidence in the economy, 2) when there is too little confidence, people slow their rates of spending, 3) when rates of spending slow, people lose their jobs, and 4) confidence in the economy lessens when many people are losing their jobs. Repeat. For the most part, however, Keynes was not talking about Roth’s “massive welfare redistribution”—which would take place all of the time and in ever-increasing amounts. On the contrary, Keynes theorized that government could break the vicious cycle by “priming the pump” of job creation with government-made work projects. The idea was to increase confidence in the economy by putting people back to work so as to change the spirits of the animals. People could get money from the rich transferred to them, but they had to work for it.[x] People getting money to enable them to stay at home and consume was no part of the theory. Keynesian theories do not support Roth’s claim that “massive redistribution” to people who produce insignificant wealth or none at all even works, much less that it “saves capitalism from itself.” (Keynes would surely reject Roth’s claim.)

Did some other giant among economists come up with a different theory to support the idea that “massive redistribution” equals “economic prosperity?” Not that I am aware of. (I’d be happy for someone to identify such a giant.) Roth may have come up with this idea on his own with a little “help” from the “Modern Monetary Theorists.”

Is there a good reason to believe that this perpetual motion theory would work? First, note that very little money in the U.S. economy is currency under mattresses. Rich people tend to invest what they do not spend, and how much they spend is influenced greatly by their anticipation of future income from such investments. Those investments fund the businesses that are creating the country’s jobs and wealth. (The people with those jobs are earning money to spend and are paying taxes that keep the government activities, including redistribution, funded.) And, of course, the rich spend a lot of money—i.e., they are the source of much of the spending (“saving”) Roth says is so essential for capitalism not to strangle itself. Taking money from the rich will, therefore, result in 1) either less spending by the rich, less investment by the rich, or both, 2) fewer jobs (less spending) than would otherwise be the case due to a lower level of investment in the country’s businesses, and 3) spreading the money available to be redistributed over more people (because there are fewer jobs/more people out of work when investments in businesses are sold off to pay taxes for redistribution). (It also slows the invention of new tools that enable people to be more productive—i.e., valuable—and get paid more.)

For a perpetual motion machine to have a chance of working, it must produce more energy than it consumes. Roth offers nothing to support the idea that the wealth created by moving money from the rich who value it less to the poor who value it more comes close to offsetting the clearly identifiable losses to the economy such transfers would cause. The Modern Monetary Theorists theorize that governments can spend as much as they want without causing any problems. Not even a formerly great economist turned fashionable pundit who is a lionized leftist, Paul Krugman, believes this nonsense.[xi]

Roth then makes a claim that appears to be supported by nothing more than his keystrokes:

“Absent the redistribution and government programs that rich countries provide, market capitalism strangles itself, through concentration, with insufficient demand to drive — to “incentivize” — its own masterful engine of production. Absent those programs, countries never make it into the the [sic] rich-country club.”

How can this be squared with the fact that the American and European economies boomed throughout the Industrial Revolution of the 19th century—a period during which there was no massive redistribution by national governments? Somehow, “the masterful engine of production” roared on (the opposite of “strangling itself”) without government “incentivized” demand. The incentive to buy was enough to create vast amounts of innovation, production, and wealth, while the standards of living grew more rapidly than ever before. In short, “The Industrial Revolution marked a major turning point in history. During this period, the average income and population began to exhibit unprecedented, sustained growth.” Standards of living of the poor rose also in this period. A case can be made that it is no coincidence that upper class people in Great Britain and elsewhere, having discovered that, with free market economies, the upper classes could prosper economically without maintaining the institution slavery, started the long process of making slavery illegal almost everywhere.

Roth then tries to prop up his so far fanciful claims by resorting to the history of the Great Depression. The weakness of that attempted support of his claim will be discussed in the next post.

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[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii] I made the same point in “Income Inequality — the Gap Is Not as Large as You May Think.”

[iii] “The velocity of money is the rate at which money is exchanged from one transaction to another and how much a unit of currency is used in a given period of time.”

[iv]Money Is Not Wealth — But It Helps Create Wealth

[v] See “Solutions” for a discussion of many ways that government actions kill people.

[vi] “The economist William Nordhaus has calculated that the inventors and entrepreneurs nowadays earn in profit only 2 percent of the social value of their inventions. If you are Sam Walton the 2 percent gives you personally a great deal of money from introducing bar codes into stocking of supermarket shelves. But 98 percent at the cost of 2 percent is nonetheless a pretty good deal for the rest of us.” “How Piketty Misses the Point” by Deirdre N. McCloskey

[vii] For more on this, see “Two Paths for America.”

[viii] John Maynard Keynes came up with the theories upon which FDR relied as he extended Hoover’s policies that turned the crash of 1929 into the Great Depression. (Some people do claim that because Keynes was not an advisor to FDR, FDR “was not heavily influenced by Keynes.” Nevertheless, Keynes was the key figure lending economic credence to the economic policies that FDR employed. Keynes gave FDR plausible theories with which to combat the barrage of highly credible opposition to his policies from Friedrich Hayek and others.

[ix]Animal Spirits

[x] Keynes: “The government should pay people to dig holes in the ground and then fill them up.” People would reply, “That’s stupid, why not pay people to build roads and schools.” Keynes would respond saying “Fine, pay them to build schools. The point is it doesn’t matter what they do as long as the government is creating jobs” [emphasis added]

[xi]The Conscience of a Liberal” by Paul Krugman

Non Sequiturs on Parade – PART VI

Let’s continue analyzing Steve Roth’s handy compilation of leftist bromides, non sequiturs, self-congratulations, and just plain ol’ errors, “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] The issue this series is addressing is: Did Roth accomplish his purpose to explain why welfare and redistribution saves capitalism from itself. (Discussions of other instructive aspects of the article can be found in PART I, PART II, PART III, PART IV and PART V.)

Roth opens his article identifying the members of “the rich country club” as the members of the OECD and then makes the following observation:

“In this measure, the richest countries all devote fifteen to thirty percent of GDP to social spending. As Bruce Bartlett pointed out recently, Germany — a darned “conservative” country that is thriving today, and which rode out our recent economic Great Whatever better than almost any other country. . . .”

First note that none of the OECD countries have pure market capitalist economies. On the contrary, as Roth asserts, they all engage in massive doses of redistribution, and universal government programs for social support and financial security.[ii] But the massiveness of redistribution varies significantly among the countries. They all, to varying kinds and degrees, have massive regulatory and tax regimes as well. Lastly, the countries vary significantly in the levels of corruption, cronyism and culture.[iii] Just how massively the countries interfere with free market behavior varies significantly on each of those variables.

To use the above fact to make the case that massive redistribution is saving capitalism (or what is left of capitalism after the massive redistributions, etc.) from itself, one must first tease out of this noisy data whether massive redistribution is the cause the success of these countries, or it is an effect of the success of their capitalism. If and only if Roth can show that massive redistribution is a cause rather than an effect of the economy’s success, can he logically proceed to make an argument that massive redistribution is saving capitalism from itself. Did he do that?

He’s got quite a bit of data with which to work. There are 35 member countries and very significant differences in the variables he deemed to be important and in their economic success. Does he show that the more massive the redistribution, the more economically successful these countries are? No. Does he present any other evidence that shows massive redistribution results in better outcomes? No. Is his table a fair representation of what is going on given that many of the countries in the OECD can engage in the amount of redistribution they do only because they freeload on America for most of their defense, funding of international organizations and relief efforts, cheap American drugs, and on American technological innovations? No. Does the single data point (anecdote) about Germany prove anything to make his case? No. Does he cite any study or other authority to support the idea that the happenstance of the massive redistributors being rich proves redistribution is the cause of their success? No. Does the observation that rich countries massively redistribute in any way support his claim that massive redistribution saves capitalism from itself? No.

So, with Roth’s facts and evidence we have discussed so far, one can only speculate whether massive redistribution is why capitalism can survive in those countries.

By using a Darwinian standard in an attempt to discredit those who would refute his claim, Roth must be suggesting that the emergence of massive redistribution in the most economically fit countries is somehow proof that redistribution is contributing to the fitness of those countries. Unless, however, he could show that massive redistribution is the only significant variable that enables capitalism to survive in these countries (and that the cumulative effect of the insignificant variables are not significant)—which he cannot and does not even attempt to do—then his conclusion is a non-sequitur. Here’s why: With the facts he presented, there is no way to determine whether the massive redistribution is adding or subtracting from the success the countries would have had with either more or less redistribution—or, conceivably, no government redistribution. (There will always be charitable redistribution whether or not there is government redistribution. Is it fair that he excluded charitable redistributions in his numbers? I think not.).

Then on the strength of this pile of speculation, his implicit suggestion is that evolution has selected the massive redistributive governments to be the fittest. I will readily grant Roth’s assertion that massive redistribution is an emergent phenomenon (evolutionary result), and is especially prevalent in rich countries. That fact, however, is a relatively recent phenomena (being employed in massive levels only over the last 50 years)[iv] and says little or nothing about whether evolution has ginned up a winning formula or one that will usher in the extinction of the wealth of OECD counties (or, at a minimum, much slower improvement in the standards of living of the poor in each country). Because history is repeat with evolutionary sorties that lead to extinction, suggesting that the emergent phenomena of an insufficiently uneducated public demanding (and therefore getting in democratic societies) massive redistribution proves nothing. More to the point, it does not prove that massive redistribution is saving capitalism from itself.

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[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii] Technically he said that they had massive redistribution when they joined the club (I’ve already debunked that assertion in PART I) and Roth does not favor us with what he means by “massive.” Whatever it is, most, if not all, did not have massive redistribution when they joined the club, and most, if not all, have massive redistribution now.

[iii]Be Like Sweden.”

[iv] The possible exceptions of Bismarck’s welfare state and The Great Depression disastrous economies—which included would fortify my argument. For good measure, I should also exclude the USSR, Mao’s China, North Korea, Cuba and the like.

“Progressives” and the Constitution

My son-in-law pleasantly surprised me this morning with a “Share a memory” on Facebook with the comment, “Thought provoking comment.” The memory was something I published on Facebook a year ago yesterday. I appreciate him doing that.

Inasmuch as it elaborates on some of the issues I am discussing in my series on Steve Roth’s article, I thought it would be useful to include it in my blog. I hope you too find it to be thought provoking.

🙛

I finally found a statement by Hillary that I believe expresses her honest feelings and is true. [That is noteworthy in and of itself, but I digress.] For those two or three of you who read my posts, the statement illustrates why I keep saying Trump would be terrible, but Hillary would be worse.

Hillary’s statement was in response to this question: “And would you use [“liberal”] to describe yourself?” Her response was: “. . . . I prefer the word ‘progressive,’ which has a real American meaning, going back to the progressive era at the beginning of the 20th century. . . .” Then she went on to describe what she called “beliefs” of “early 20th progressives” that were really only the aspirational talking points they used. She did not actually describe their beliefs or the key feature of their agenda.

To understand the beliefs and the key feature of early 20th “progressives” one must first understand the “genius of the Constitution” (to borrow a phrase my cousin used yesterday). In Federalist #51[i] James Madison summed up the situation being addressed by the drafters of the Constitution: “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.” The founders came up with an ingenious way to deal with this timeless situation that both the governed and the governors are fallible and flawed.

Through extensive study and wisdom, the founders concluded that freedom is the best elixir to induce human flourishing. They understood that individual freedom would not lead to a Nirvana in which every citizen is wealthy and happy—because such a society was not possible on Earth—far from it. Rather they believed maximum feasible individual freedom would create more wealth and happiness than any other government scheme that afforded citizens less freedom. They also believed that government was necessary to maintain enough law, order and national defense to allow people to enjoy their freedoms and the fruits of their labors that also was essential to human flourishing. But they also knew that rulers of any sort tend to use whatever power they have first and foremost to serve their own interests and satisfy their desires to achieve a sense of superiority by taxing and bossing people around. Consequently, rulers tend to limit people’s freedoms and accumulate power for themselves over time. At the end of this process you get Cuba, the Soviet Union, North Korea, Nazi Germany, Venezuela, and the like.

The founders’ ingenious solution (the Constitution[ii]) deals with these human foibles with three key features: 1) the rulers were granted only very limited powers, i.e., the rulers were not given authority to take away the peoples’ inalienable rights and fundamental freedoms; 2) in order to keep the rulers in check, three branches of government were created, each of which had the power and incentive to keep the other two branches in check; and 3) it set up a gauntlet through which any bill to enact a new law would have to pass that was so tough that there would be gridlock unless the law was so good that it would be widely accepted. Ideas contained in bills that could not endure the gauntlet could be tried in the states to be proven meritorious[iii] or worthy of the graveyard of bad ideas, or they could be generally accepted and practiced by society such that no law is needed.

Enter the early 20th “progressives.” They believed both technological and political science had advanced so much since the founding that politicians, bureaucrats and their experts could achieve better results than would be achieved by society via the free exchange of ideas, free trade, entrepreneurial innovation and state-by-state experimentation,[iv] i.e., cultural evolution. They generally viewed citizens and state and local governments as too uneducated and/or dumb to take care of themselves. They honestly believed (as do today’s “progressives”), that government knows enough, is smart enough and effective enough to run our lives better than we could, and that politicians will put the best interest of the citizens ahead of what is in the politicians’ own interest (retaining and growing their own power, wealth and prestige), i.e., that they are near enough to angels to do the job. [This general belief by rulers that they can run things better than “The People” has been around since the beginning of time— it is a fallacious belief of which the founders were fully aware. If the belief were true, surely everyone would now (after over 100 years of much “progressive” government action) behold the wonders of government running everything—and the Soviet Union would be ruling the world by now. History has shown time and again that these beliefs are invalid—but I digress again.]

The Constitution prevented the early 20th century “progressive” geniuses from doing what they wanted to and believed they should do. “Progressives” had a problem, however. The vast majority of the voting public loved the Constitution.[v] It had propelled America from an insignificant group of colonies to an economic powerhouse and a major world power in an amazingly short period of time. The only way “progressives” could gain the power they so savored was to undermine the legitimacy of the Constitution. This has been the common denominator of all “progressive” presidents from Teddy Roosevelt to BHO. The most effective demolition of the Constitution’s legitimacy has been done by Woodrow Wilson, FDR, LBJ, WJC and BHO. No slouches in this enterprise were Hoover, Nixon and GWB. Hillary, by her own admission and by what she says and does, wants to carry on in this grand enterprise of abandoning individual freedom in favor of collectivism and unlimited government. Hillary and her “progressive” predecessors occasionally mention the Constitution, but it is with no reverence [did you see there were no embarrassing and divisive American flags at the Dem convention yesterday?] and only when it happens to say something with which they happen to agree. Otherwise the Constitution [and it looks like the flag is next] is considered a relic. See the recently published book: “Relic: How Our Constitution Undermines Effective Government–and Why We Need a More Powerful Presidency.” Right on cue for Hillary’s run for the White House.

Have “progressives” been successful? Richard Posner, a renowned and influential progressive federal appeals court judge, reflecting the sentiments of most other progressives, said recently, “I see absolutely no value to a judge of spending decades, years, months, weeks, day, hours, minutes, or seconds studying the Constitution, the history of its enactment, its amendments, and its implementation. . . .”[vi] By and large this statement was positively received, when it was noticed at all by the “liberal” main-stream media. When Speaker of the House Nancy Pelosi was asked to site the provision of the Constitution that authorized Congress to force citizens to buy health insurance under Obamacare, Pelosi responded, “Are you kidding? Are you kidding?”[vii] Next question.

By contrast, there is no sign that Trump knows anything about the Constitution. He would know more about it if he were out to tank it. I’ve heard him more than I can stand, but I’ve never heard him rely on the Constitution’s precepts to support his positions (he appears to rely only on his own instincts). Some of the things he says he will do appear to violate the Constitution and its precepts. On the other hand, while he may violate the Constitution from time to time (all presidents do that), there is no apparent reason to believe that he will actively seek to further undermine the Constitution as BHO has and Hillary would. Hillary would love nothing more than to be the person who ultimately fulfills the dreams of “early 20th progressives.” It is for these reasons that I say, Trump is terrible, but Hillary would be worse.

BTW: I put the term “progressive” in quotes because “progressives” want to regress back to something akin to the divine right of kings rather than to continue to progress with the ideas the founders had in mind.

[Edited July 27, 2017 to eliminate some grammatical errors in the original. The grammatical errors that remain are in the original and to add some reference material. None of the endnotes, some of which elaborate on certain points, were not in the original version.]

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[i] The Federalist Papers No. 51.

[ii] The United States Constitution

[iii] A kind comment to this Facebook post a year ago advised me that the verbalization of the idea that states are the nation’s laboratories of political and economic science experiments is first found in the 19th century—not the 18th century in which the Constitution was devised. While we cannot exclude the possibility that some of the founders had this idea in mind, I do not have a specific references that can be attribute this notion to the founders. I apologize to my readers for that possible error in what I said.

[iv] By the time the “progressives” came along, the idea of states being the nation’s laboratories was well understood by political scientists.

[v] Back then when the federal government was vastly less involved in education, teaching children the value of the Constitution and its ideals, and reverence for the founders was commonplace. Those teachings are nearly the opposite of predominate teachings with respect to the Constitution and founders that we find in government run or subsidized schools and universities today. This is all a testament to the effectiveness of the “progressive’s” strategies and plans to rewrite history—and a confirmation that the winners write the history.

[vi]Judge Richard Posner: ‘No value’ in studying the U.S. Constitution.” (I am aware that Posner wrote a follow up op-ed in which he mischaracterized the substance the criticism of his original piece. In that op-ed he doubled-down on what is wrong about his position. He said, “constitutional law is and must and maybe should be entirely a judicial creation, like fields of common law.” Common law is the law that emerges as judges exercise their authority to decide how controversies should be resolved in light of what the courts have said before and statutes on the books.  Unlike common law, judges do not create constitutions. The primary purposes of constitutions is to authorize the executive, legislative and judicial branches to do things and to limit specify the limits of that power.  Consequently, unlike the common law which is created by judges, the constitution is created by the people to limit what judges can create. Posner’s claim is that judges should not feel constrained by the limits the antiquated constitution would dare to place on them.

[vii] This too contained an error. She actually replied to a question about the constitutional authority for her action, “Are you serious? Are you serious?” Thankfully, I had the substance correct.

Non Sequiturs on Parade – PART V

Let’s continue analyzing Steve Roth’s handy compilation of leftist bromides, non sequiturs, self-congratulations, and just plain ol’ errors, “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] This series of posts addresses the following question: Did Roth explain why welfare and redistribution save capitalism from itself? (Prior posts on this question can be found in PART I, PART II, PART III, and PART IV.)

Author’s Note: I bear no animus toward Mr. Roth. As the article being discussed is the only writing of his I’ve ever read, I do not know if it is typical of his work. I assume he believes what he is saying and believes his ideas are in the best interest of society. I’m picking on this article because it is so illustrative of many of the myths and fallacies that underlie the left’s narrative. I do bear animus toward pedaling the article’s faulty notion that giving government more money and control over the economy has in the past and will in the future result in better outcomes, and that trimming the government’s overgrowth will lead to ruination. My hope is that a focus on the article’s illogic and faulty interpretations of history will help reveal that Pied Piper tales like this one may sound nice, but that they lead us astray. Everyone should also be aware that many of the leftist “facts” and historical perspectives presented in the article are highly contested by many academics, including at least three Nobel Prize laureates in economics, whose works are antithetical to the interests of power grabbing politicians and the academics hired or subsidized by the government to produce papers and testimony that support the politicians’ power grabs. (In my opinion much of what comes out of academia is political propaganda). Sadly tales like the ones Roth spins are (not surprisingly) taught in our government subsidized schools.

Let’s continue sorting this out.

Let’s first touch on a relatively minor—nevertheless clarifying—matter. Exactly what is the difference between “welfare” and “redistribution” such that they needed to be separately identified as necessary to “save capitalism from itself”? It is not self-evident, and Roth didn’t say. Because he failed to explain why either or both “save capitalism from itself,” perhaps this question is not important. Roth may have just been preening before his fellow leftists—with no actual thought behind the word choice. For this reason I’ll use the word “redistribute” to cover both items.

What does “saves capitalism from itself” mean? Let’s take a look at what capitalism is.

Capitalism: An economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth.[ii]

Capitalism (this poor word eschews the essence of the system it attempts to describe)[iii] is what enables people to create wealth in excess of what is necessary to fulfill the basic needs of those from whom wealth is taken in order to give that “excess wealth” to people deemed to have insufficient wealth.[iv] (This statement is simpatico with Roth’s acknowledgement of the “immense, world-changing, manifest benefits, market capitalism”[v] bestows on humans.) Functionally “capitalism” is a system in which individuals specialize in producing things valued by other individuals and voluntarily trading their products with others who specialize in producing other things of value. There is much inherently good about this cooperative human activity. First and foremost, it induces people to cooperate for the benefit of all and involves no coercion or threats of violence. The process is indifferent to the participants’ race, color, creed, or origin, and, therefore, encourages cooperation among all people.[vi]

As I have discussed in “Wealth” and many other posts, specialization and trade create wealth. The existence of wealth 1) is essential to fund research, innovation, production, and delivery of the cornucopia of things which have contributed so mightily to human progress and flourishing, 2) increases the time that can be spared for contemplation, play, leisure, and sleep, and 3) provides the wherewithal to be charitable. Do humans really need to be saved from capitalism? Surely not. Consequently, Roth’s central claim is nonsense.

Rather than saying something accurate and helpful, Roth, as leftists so often do, is smearing (perhaps for political purposes) the word “capitalism” by conflating it with 1) the fraud, corruption, cronyism, illegality, mistakes, and other malefactions humans bring to capitalism— just as they do to any economic system, and 2) the envy, jealousy, etc. (the most significant of which were discussed in PART IV) that are negative reactions people have when some wind up with significantly more wealth than others (which under capitalism is inevitable by virtue of the fact that certain people are significantly more productive than others). “We” do need to be saved (if possible) from the consequences of letting bad actors and bad ideas operate in conjunction with a capitalist economic system become so large that those negatives exceed the “immense, world-changing, manifest benefits” capitalism generates. This is the “saving”[vii] with respect to capitalism that is important or meaningful. Because he does not discuss these, Roth does not address the real issue of the topic about which he is writing. Worse, his commentary fans the negative embers or flames that smolder or rage in the minds of some people who, for whatever reason, wind up with significantly less than the most productive individuals.

Taking property under threat of force in order to redistribute it to people who do not produce enough to sustain a lifestyle acceptable to them is fundamentally antithetical to the voluntary exchange implicit in capitalism. The more “we” redistribute wealth, the less wealth to be redistributed will be generated, and the less 1) research, innovation, development, and delivery of the cornucopia of things which have contributed so mightily to human progress and flourishing and 2) time that can be spared for contemplation, play, and leisure. The blessings of capitalism are most vivid among the rich. Capitalism’s ability to improve the absolute standard of living of the poor is the much more remarkable wonder of capitalism—regardless of the fact that the poor never seem to realize, much less appreciate  it.[viii]

To be sure, I am not saying, “Therefore, there should be no redistribution.” I am trying to bring important clarity to a tradeoff that is being made when “we” redistribute. Certainly, voluntary charitable “redistribution” should be admired and otherwise encouraged. That is another form of voluntary exchange in which givers get good feelings (or, in less virtuous cases, good PR) and recipients get things they need and would not otherwise have. Moreover, some forced redistribution, when done well, does more good than harm. However, most of how government actually redistributes does more harm than good.[ix] I may not even be opposed to “massive” redistribution, depending on how much “massive” is and how effective the programs are at accomplishing the stated goals.

Again, does Roth’s discussion of capitalism advance his claim that capitalism needs saving or that welfare and redistribution save capitalism? I think not.

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[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my posts about the article.

[ii] Capitalism definition.

[iii] See What are the biggest misunderstandings about capitalism?

[iv] id. Also see, “You will always have the poor among you. . . .” to see why (1) America’s poor are in the top 1% of the wealthiest humans to ever live, but are, nevertheless, fairly described as “poor,” (2) they will remain poor even with vastly more redistribution of wealth to them, and (3) the absolute standard of living of the poor will rise faster if the amount redistributed to the poor were less.

[v] I have no idea what Roth thinks he is adding to the concept when he puts “market” in front of “capitalism.” Is there some other kind of capitalism? If anyone knows, please let me know.

[vi]When goods don’t cross borders, soldiers will.” Frederic Bastiat

[vii] Just as there are no “Solutions,” there is no “saving” from all negative consequences and human reactions no matter what economic system is employed.

[viii] See, “Wealth Creation. No Happiness, Why Bother?

[ix] I understand and respect those libertarians who place such a high value on liberty that they reject any utilitarian justification for curtailing liberty. That position has much positive to be said for it. I also see the slipperiness of the slope once one moves off that high plateau—once the principle is conceded, a slide to the bottom of the abyss may become inevitable. America’s trajectory appears to be a confirmation of that fear. However, I believe that all things human involve slippery slopes and that massive utilitarian benefit in exchange for a slight loss of freedom is warranted. The Constitution is evidence that the founders believed absolute freedom is not optimal. I also believe that America is currently far beyond the point of diminishing returns with the compromises to freedom it has already made.

Non Sequiturs on Parade – PART IV

This is a respite from discussing the overt errors in Steve Roth’s article “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] Previous discussions of these can be found in PART I, PART II, and PART III.

Here, I want to 1) acknowledge something good that Roth did in his article, 2) acknowledge that income inequality (the evils of which are Roth’s unstated presumption for the article) creates problems for individuals and society, and 3) offer some comments about income inequality. I’ll also discuss Roth’s presumptions.

I commend Roth for having acknowledged that market capitalism creates “immense, world-changing, manifest benefits.” (It would have been much better had he elaborated on how truly marvelous, wonderful, [ii] and essential “market capitalism” is to the creation of massive innovation[iii] and the wealth that he is so anxious to redistribute, but we should cut him some slack because no one article can contain everything that needs to be said on any subject.)

Let’s also be charitable and assume that Roth meant to say something reasonable about “market capitalism” like, “as a general rule, 1) ‘market capitalism’ tends to distribute wealth into the hands of people who make or do things that satisfy the wants and needs of others, 2) distribution is roughly in proportion to the quality (as measured by the people who need or desire the things) and quantity of things people produce, 3) because of their varying combinations of skill, effort, perseverance, and luck, some people are exponentially better at producing needed and desired things than others,[iv] and, as a result, 4) money tends to exponentially wind up in the hands of the exponentially more productive people.” That would have been an accurate statement. (The implications of this accurate statement on the subject, however, are quite different from the implications of the actual statement Roth made.)

Some will surely protest that the general rule described above is too full of exceptions to stand. I would counter that the vast majority of exceptions to the general rule in free markets of money flowing into hands in rough proportion to the value of the things produced by those hands arises when government gets involved in business (or via voluntary charity). When government passes laws or regulations that create competitive advantages for particular companies or regulators enforce unbiased laws or regulations in such a way as to protect certain businesses from the vicissitudes of a free market, government is thereby directing the flow of money to some companies and away from others that could otherwise compete for the funds in the marketplace. Indeed, the fact that people spend vast amounts of time, money, and effort lobbying the government to intercede on their behalf vividly helps prove this rule. (Stated differently, this is about the need of people/companies to be protected from the competition that a free market would generate.)

In my discussion of Roth’s article, it is important for me to acknowledge that income inequality creates many problems for some individuals and for society—as my blog posts on income inequality often state. Among those many problems, income inequality 1) engenders unhappiness in several ways, including a) jealousy and envy,[v] b) various combinations of guilt, embarrassment, self-deprecation, and hopelessness (from not having the ability, drive, and/or “it” to achieve as much as others or falling short of the expectations imposed by others or by oneself), 2) heightened awareness of cosmic unfairness (some call it “social injustice”[vi]), and 3) anger. Too much anger in too many people can result in riots, revolutions, police states, or anarchy. These negative effects of income inequality alone create great challenges for society. Some lay on the doorstep of income inequality many other evils, including mass death. While some common claims in this regard are overblown or bogus, there is some merit to most of the claims of the negative effects of income inequality. As discussed in my “Solutions” post, however, believing that the existence of a problem means that government can both solve and afford to solve the problem is childish. Additionally, given all of the problems created by government action, blind faith that a proposed government “solution” will cure more problems than it creates is folly. There are, of course, situations in which government “solutions” do more good than harm, e.g., our justice system. It is very likely that there are no government programs that do not create many harms and injustices, e.g., our justice system.

I find leftists to be all over the place as to exactly what the goals of redistribution are. The stated goals include: 1) it is economically advantageous to society (this is the primary focus of Roth’s article), 2) taking from the rich and giving to the poor is what moral people do (generally without regard to the effect of doing so has on the economy, innovation,[vii] or anything else—including the harm done to the intended recipients of the redistributed wealth and their descendants), 3) the poor deserve help (usually without regard for any culpability a person may have for her state of affairs[viii] and often based on imaginary or grossly overblown metrics), 4) the world will be a better place the more “we” redistribute, 5) it enables people to be healthier, thereby causing them to be more productive, 6) it will extend the lives of more people, thereby leading to more innovation, and 8) if “we” do not massively redistribute, the rabble will burn the place down. Note how strange bedfellows some of these goals are to others—some actually work at cross-purposes to others. For example, is support for redistribution motivated by caring for others or saving oneself from rioters and revolutionaries? The fact that there are so many justifications might be an indication of how uncompelling or insufficient each justification is.

Nevertheless, the problems created by income inequality cannot be safely ignored by society. It would have been fair for Roth to have discussed the evils of income inequality, but he did not do that. Rather, he appears to presume that income inequality is uncompromisingly bad and that massively reducing it would be an unalloyed benefit to both society and the recipients of the redistributed wealth. He also appears to believe either that forcible “massive redistribution” by the state cures the problems of income inequality (of course it cannot[ix]) or, at a minimum, that it does more good than harm.

Standing atop some combination of inconsistent, flawed, and/or highly compromised presuppositions, Roth advances flawed economic claims as to “Why Welfare and Redistribution Saves Capitalism from Itself.” We will return to that in the next part.

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[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii] See “It’s A Wonderful Loaf” by Russ Roberts

[iii] See “Income Inequality Is More Than It is Cracked Up To Be.”

[iv] See “Jordan Peterson on creative productivity and the One Percent.” (What Dr. Peterson says here is a fair and accurate discussion of the general state of affairs with respect to highly productive people. I do not, however, vouch for the precision of his numbers, as they might not apply to every organization. Also, his discussion of Monopoly is highly instructive, but only roughly correlates to the real world. Nevertheless, as usual, Peterson nails the big picture.)

[v]Deirdre McCloskey on the ethics of income equality.”

[vi] See “What is Social Justice?

[vii] For discussions of the many benefits of income inequality see, “Income Inequality Is More Than It is Cracked Up To Be,” “Wealth,” and “Wealth Creation – It’s For The Children, and their children, and their children. . . .

[viii] See “Equal Rights or Equal Outcomes?”

[ix] See “‘You will always have the poor among you. . . .’”

Non Sequiturs on Parade – PART III

Here’s some more on what is wrong with Steve Roth’s article “Why Welfare and Redistribution Saves Capitalism from Itself.”[i]

Roth’s next burst of brilliance is this:

Market capitalism — especially modern “holding-company capitalism,” in which corporations own corporations which own corporations, ad infinitum — inevitably concentrates wealth and income into fewer and fewer hands. It’s just the nature of the beast. Along with its immense, world-changing, manifest benefits, market capitalism labors under that inescapable burden.

So far Roth is batting a thousand on blatant falsehoods.

According to Forbes Magazine, “The 1996 annual ranking of the 400 wealthiest Americans by Forbes magazine includes a record 121 billionaires, 27 more than last year.”[ii]

According to Forbes Magazine in 2016, “America boasts 540 billionaires, more than any other country on the planet and more than all of Europe combined.”[iii]

Mr. Roth, how’s that “fewer and fewer hands” comment working out for you so far?

The number of newly minted millionaires between 1996 and 2016 (3.5 million[iv] compared to 10.8 million[v]) is massively greater than the number of newly minted billionaires, but more of the difference in millionaires can be attributed to changes in the value of the dollar between the two dates. Nevertheless, these numbers reveal that, rather than “concentrate[ing] wealth and income in fewer and fewer hands” (as Roth claims), the numbers of hands filled with income and wealth grows dramatically in America over time (to say nothing of the astonishing quality and utility improvements and the lowering of real costs of the things that can be purchased with that money).

Consider also that America is considered one of the most “market capitalist” countries among the OECD members; that is, America’s massive redistribution programs are less proportionately massive than the others’. Nevertheless, “of the 1.8M net increase in global millionaires [in 2012], more than 9 out of 10 were Americans.”[vi] Clearly the approach of one of the least redistributive country (America) is concentrating wealth in relatively[vii] more hands than those who attempt to more massively redistribute wealth.

Consider these facts:[viii]

  1. “Using a panel of tax returns from 1999 through 2007, this report[ix] finds that nearly 60 percent of households in the bottom quintile in 1999 are in a higher quintile in 2007 (and more than 16 percent are in one of the top two quintiles in 2007). Roughly 40 percent of tax returns in the top quintile in 1999 are in a lower quintile in 2007 (and more than 14 percent moved down by two or more quintiles by 2007).
  2. The report also examines the persistence/transience of millionaires and finds that this group of taxpayers, which has been the focus of millionaire surtaxes among some states and some tax policy proposals at the federal level, is highly transient. Roughly 50 percent of those taxpayers who were millionaires at some point during the 1999 through 2007 period attained this status just once. In contrast, only 6 percent of this group of taxpayers were millionaires in all nine years. . . .
  3. “Millionaires are a highly transient group of taxpayers, and it appears that the realization of capital gains is at least one explanation. This income source tends to be lumpy and periodic and is a major explanation for why taxpayers reach millionaire status.”

Contrary to what Roth would have you believe, market capitalism neither reduces the number of hands into which wealth flows nor creates perpetual dynasties of riches. Trust-fund babies have at their disposal only what is left over after estate and inheritance taxes are collected (and presumably spent for the good of society at large). Trust-fund fools and their money are soon parted. (And this represents many trust fund babies if “only 6 percent” of millionaires remain millionaires for as little as nine years.) Wise trust-fund babies tend to give away much of their money (the guilt—which is no fun—of having unearned riches is no doubt a significant factor) and invest what is left over wisely. Wise investments create businesses that efficiently create jobs and serve the wants and needs of people. All in all, many people getting rich ain’t all bad.[x]

All of this assumes that America’s economy is “market capitalism” and that market capitalism is what causes a greater concentration of wealth than Roth would prefer. I’ll address the fallacy of that assumption in the next post.

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[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii] See “121 Billionaires Top Forbes List of 400 Richest Americans.”

[iii] See “The Full List Of Every American Billionaire 2016.”

[iv] See “Amway Produces More Millionaires Than Any Other Type of System.”

[v] See “A record number of Americans are now millionaires, new study shows.”

[vi] See “Land of opportunity: Of the 1.8M net increase in global millionaires last year, more than 9 out of 10 were Americans.”

[vii] Currently America’s population is approximately half of Europe’s.

[viii] See “The Highly Transient Millionaires.”

[ix]  “The Tax Foundation, “Income Mobility and the Persistence Of Millionaires, 1999 to 2007.”

[x] See “Income Inequality Is More Than It’s Cracked Up to Be.”

Non Sequiturs on Parade – PART II

Here’s some more on what is wrong with Steve Roth’s article “Why Welfare and Redistribution Saves Capitalism from Itself.”[i]

Roth’s next main claim is this:

Now contrast these [massively collectivist] countries to all the countries that have eschewed those freedom-sapping, serf-ifying government programs, and that have emerged as thriving, prosperous utopias of liberty.

Name one.

Why hasn’t it happened? Not even once.

First, observe that Roth has put the cart before the horse. Massively collectivist countries can be massively collectivist only because they have become wealthy enough to become massively collectivist. Mozambique, Niger, and Burundi have no chance of joining the rich countries’ club by adopting massive redistribution programs. (Roth admits as much later in the article.) First of all, they do not have massive amounts of anything to redistribute. Attempting to redistribute more than they currently do would make the countries even poorer (because the redistribution of wealth always involves taking money from those more capable of producing wealth and giving what is left over after “the system” skims off[ii] a significant amount for political and other unproductive uses). On the contrary, their only chance of becoming prosperous is to adopt the most pro-free trade policies that the populous will stand.

Put succinctly, no country can emerge from relative poverty and join the rich club without keeping freedom-sapping programs sufficiently at bay over a long enough period so that it can create the wealth to become massively collectivist.

Then, realize that, in two respects, Roth has moved the goal posts he established in the preceding paragraphs. In his opening salvo, Roth holds up as the optimum standard “massive doses of redistribution, and universal government programs for social support and financial security.” Note that he refers only to “massive doses.” He did not say that the wealth of the country must be completely redistributed (so that everyone had identical levels of income as well as social and financial security). Therefore, implicit in his claim is that, to some degree, the current members of the rich and prosperous club have and currently do “eschew” full implementation of “freedom-sapping, serf-ifying government programs.”

Note also that nowhere does Roth claim that any of the rich collectivist states he reveres are utopias. He has not taken upon himself the challenge of naming even one collectivist government-run utopia. Nevertheless, Roth suggests that he is proving some point by asking his readers to name a “utopia of liberty” that has thrived and become prosperous. Asking a preposterous question that you would not ask of yourself proves nothing.

While I cannot claim that England, America, Germany, and all of the other current members of the rich countries’ club were or are now utopias, I can claim (and in the immediately preceding post did claim) that they all became members of the club when they eschewed to a very considerable degree the “freedom-sapping, serf-ifying government programs” that Roth is touting.

In short, had Roth set the same standards of measurement (goal posts) for his opponents as he set for himself, it would have become clear that not only one, but many if not all of the current members of the club became members because they sufficiently eschewed “those freedom-sapping, serf-ifying government programs.”

To not engage in half-truths,[iii] Roth should have named all countries that became too massively collectivist and either fell out of the rich club[iv] or cut back on collectivist policies in order not to fall out of the rich club.[v] He also should have noted how much less rich and technologically advanced most of the members of the rich club would be if America did not provide most of the innovations, defense, and funding for the collective state action (e.g., the U.N. and NATO, trying to keep bad actors in the world at bay) upon which they rely. America could not carry such a heavy load and would not be the world’s fountain of innovation if it were to become even more collectivist.[vi]

China is a glorious example of a country joining the club only after it eschewed much of its quintessential “freedom-sapping, serf-ifying government programs” in favor of free markets and less redistribution. How does Roth reconcile this gigantic contradiction to his thesis? Crickets.

In short, the second claim does not prove that “Welfare and Redistribution Saves Capitalism from Itself.”

Perhaps he will get around to actually advancing his thesis later on in the article. (Don’t hold your breath.)

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[i] If you haven’t already done so, please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii] See “Obamacare – Repeal, or Repeal and Replace? PART I,” specifically Siphoning.

[iii] See “The Truth Is Hard For The New York Times.”

[iv] E.g., Latvia (which went from reasonably non-collectivist to almost completely collectivist as part of the USSR), Venezuela, Greece, Portugal, and Spain remain in the club only because they are being bailed out by the EU (and relying on the U.S. for innovation, defense, and other benefits).

[v] E.g., Sweden.

[vi] See “Income Inequality — the Gap Is Not as Large as You May Think,” “A Comment Worthy of a Post,” and “Two Paths for America.”

Non Sequiturs on Parade – PART I

A friend who holds a degree in political science from a prestigious university recently shared on Facebook this article by Steve Roth: “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] It may be the most quintessential example of leftist bromides, non sequiturs, self-congratulations, and just plain ol’ errors I’ve ever seen. Sorting out the many wrong things about the article should be quite useful to obtain a deeper understanding of political debates about economics in America.

[BTW: I’m taking a new approach to this series of posts. See Author’s Note below the endnotes.]

As the title of Mr. Roth’s article implies, the author claims (and seeks to convince his readers) that “welfare and redistribution saves capitalism from itself.” He tries to make that case by several different means. Let’s sort out whether he accomplished his objective.

Mr. Roth’s first point is this:

“No country has ever joined the modern, high-productivity, rich-country club without massive doses of redistribution, and universal government programs for social support and financial security. Not one. Ever.”

(For the sake of brevity, I’ll use the words “collectivist government”[ii] to represent the government described in this claim.)

Let’s first observe that the claim is patently false. To see this, note that no “modern, high-productivity, rich-country” achieved that status yesterday. All those countries are the product of policies in place as they became more productive and rich relative to other countries. As we will see, collectivist governments of today are nothing like the governments of those countries when they joined the relatively “high-productivity, rich-country club.”

Most “modern, high-productivity, rich-countr[ies]” achieved that status as a result of their participation in the First and Second Industrial Revolutions (1760 to sometime between 1820 and 1840 and between 1840 and 1870, respectively). Although there were many attempts at collectivist governments over the centuries, few, if any, of the countries that had massively collectivist governments before 1870 became highly-productive or rich as a result of the First or Second Industrial Revolutions.

It was only after Germany became rich at the end of the Second Industrial Revolution that Chancellor Bismarck kicked of the modern era of collectivist government. The UK initiated its “welfare state” with the election of the “Liberal Party” in 1906. America kicked off its “welfare state” in the 1930s. The period between 1906 and 1930 was a period in which the US put the UK in the shade economically. All of these welfare states started after counties distinguished themselves as “modern, high-productivity, rich-countr[ies].”

Note also that Mr. Roth offers no example of a country with a massively collectivist government economically gaining on, much less overtaking, a country with a less collectivist form of government.

Worse, he ignores clear examples that refute his claim. I’ll mention one. (While there are several, just one is necessary.) Estonia clearly contradicts his assertion that “no country has ever joined the modern, high-productivity, rich-country club without massive doses of [collectivist government].”

“After Estonia moved away from Communism in the late 1980s and became an independent capitalist economy in 1991, it emerged as a pioneer of the global economy. . . . The country has been quickly catching up with the EU-15; its GDP per capita having grown from 34.8% of the EU-15 average in 1996 to 65% in 2007, similar to that of Central European countries. It is already rated a high-income country by the World Bank. . . .  Because of its economic performance after the Soviet breakup, Estonia has been termed one of the Baltic Tigers.

“In 2008, Estonia was ranked 12th of 162 countries in the Index of Economic Freedom 2008, the best of any former Soviet republic. The same year, the country was on bottom of Europe by labour market freedom. . . .” [iii] [Emphasis Added.]

“With a population of just 1.5 million, Estonia does not have a very large welfare budget in either absolute or relative terms.”[iv] [Emphasis Added.]

Estonia, like all its fellow Soviet satellite states, was impoverished in 1991 when it gained freedom from the USSR, but it was among the poorest.[v] Before the Berlin Wall fell, Estonia’s estimated GDP per capita was $2000 while neighboring Finland’s was over seven times that. “. . . during 1993-1994, Estonia went from an almost unknown spot in the world for foreign investors to a mecca for them.”[vi]

How did Estonia pull off “The Estonian Economic Miracle?” Estonia had the good fortune of electing Mart Laar, a fan of Milton Friedman[vii] (a staunch opponent of collectivist government), as Prime Minister (1992-1994 and 1999-2002).[viii] Using free-market economics and a small welfare budget, Laar enabled Estonia to become a “modern, high-productivity, rich-country.” In short, contrary to Mr. Roth’s claim, Estonia is a country that became a member of the modern, high-productivity, rich-country club without massive doses of collectivist government.

The main takeaways of this post are: 1) Presenting a factually false claim, as discussed above, proves nothing; 2) The fact that rich countries today are “massively” collectivist proves neither that collectivism is what enabled them to join the rich and collectivist “club” nor the proposition that a country must be collectivist to become rich. Consequently, Mr. Roth’s first claim does not support the general claim that “welfare and redistribution saves capitalism from itself.”

There is much more to this story, which will be taken up in future.

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[i] Please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.

[ii] This term is intended to describe any form of government (regardless of its label) that has a primary mission to “run the economy” in way that redistributes wealth from “the rich” to “the poor.”

[iii]Estonia Investment and Business Guide Volume 1 Strategic and Practical.” Pg. 25.

[iv]Which are the best countries in the world to live in if you are unemployed or disabled?

[v]  “The Estonian Economic Miracle.”

[vi] See endnote vi.

[vii]  In “Walking on Water: How to Do It,” Laars said, “It is very fortunate that I was not an economist, I had read only one book on economics – Milton Friedman’s “Free to Choose.”

[viii]Mart Laar’s Economic Guidebook for Estonia: Free To Choose

Author’s Note: I’ve been advised that my blog posts are too long. I plead guilty to that charge. My excuse has been that the ideas covered by my blogs are so multifaceted, steeped in misunderstanding, and dangerous that a fairly thorough drubbing of them is necessary for the sake of our children and grandchildren (and everyone else in the world). This is why I spend so much time writing blog posts. I have also been concerned that unless I cover the waterfront, skeptics will jump and cling to what they believe to be unaddressed counterpoints that refute my arguments—and dismiss my arguments on that basis. On the other hand, if my posts are so long and rambling that too few read them, I am defeating my own purposes. Therefore, in tackling the many flaws in the article hyperlinked above, I will try presenting more bite-sized pieces of data and analysis and cover topics over several posts.