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…”