Author: Harvey Cody

HOW POLITICIANS ARE MAKING MATTERS WORSE

In PART I of this series of posts on healthcare, I made the case that because of the unrealistic beliefs embodied by U.S. statutes and in the minds of Americans, the U.S. healthcare system is unsustainable—and that Obamacare has made matters worse. Obamacare has doubled down on the false idea that the U.S. can afford to pay for all of the healthcare every citizen wants on-demand, without each citizen having to bear significant costs for consuming healthcare. The demand for healthcare will outstrip the healthcare supply, and the costs of healthcare will spiral upward as the consumption of healthcare increases.

The post also explained that the spiraling costs of a universal healthcare system will negatively affect much more than the national debt and the healthcare system itself. Even assuming there is enough money to redistribute to serve every citizen’s whims with respect to healthcare (which there isn’t), whatever money is directed to healthcare problems is money that will not be available for any other needs. Given the numerous “needs” Americans are able to conjure, many other needs will then go unaddressed due to insufficient funds. In particular, if America’s healthcare system is nationalized, the fountain of medical research and development upon which all nations rely for innovation will decrease to a trickle, as is the case in all countries with nationalized healthcare. This will be extremely costly to ourselves and our children (and all the present and future people in the world) whose cure could have been invented in their lifetime—but wasn’t.

Lastly, I pointed out that no matter how wonderful it would be if everyone could have access to free healthcare, or how “immoral” it would be to deny everyone’s wants or needs for healthcare, if the costs would be more than the country can bear, then it is impossible for all citizens to have all the healthcare they want at a cost below the cost of producing that healthcare (much less at little to no cost). Labeling unlimited access to healthcare a “right” does not change the reality of unaffordability. It only validates a fallacy and escalates the demands for the impossible.^[i]

So, what have politicians been doing to address this welfare problem? Let’s sort that out.
🙛

There are no solutions with respect to any public policy decision—including healthcare policies—because there are unavoidable negative consequences to every policy.^[ii] Public policies usually (if not always) advance certain moral objectives and rather other moral objectives— and often at the expense of other moral objectives.^[iii] Despite this unavoidable fact of life, politicians tend to do what they can to obscure these realities from the citizenry. (They do this because the gullible and uninformed citizens not only believe politicians when they say they have “the solution,” but also tend not to vote for politicians who do not promise fantastic solutions—policies which do good, have no negative consequences, and are affordable because they are so good (funded by unicorn poop I suppose.)^[iv]

Rather than carefully weighing and explaining to the public the unavoidable tradeoffs with respect to healthcare, politicians have been touting what they call “solutions.” In other words, they are doing what they believe will get them reelected. They 1) promise the fantasy of something for nothing (or very little), 2) talk only about the benefits of their proposals and ignore or minimize their costs, and 3) provide plentiful platitudes so that people feel good about themselves for being in favor of the politician’s proposal—in short, they provide half-truths^[v] about the morality and affordability of the “solutions” they propose. Without ever stating it explicitly, progressives also take advantage of an unsavory sentiment among a growing percentage of the population. The sentiment is that taking wealth from “the rich” is not only necessary (because that is where the money is), doing so is good because it punishes rich people for their wrongdoing (it is assumed, without evidence, that everyone who is rich is so because of luck, exploitation or criminality), or that the rich do not pay some unquantifiable “fair share” of taxes (often on the bogus argument that Social Security and Medicare taxes should be considered in the determination of everyone’s share of taxes^[vi]).

(How policies based on “you work, I (or people for whom I have compassion) eat” is, at a minimum, not an unalloyed good was discussed in my blog post, “Income Inequality Is More Than It’s Cracked Up To Be.”)

The least helpful politicians confuse healthcare with welfare (as discussed in PART I). In the process of turning the healthcare system into a welfare system, they have made healthcare more costly and suppressed its production and innovation. This has been done by increasing regulations, adding layers of costs to the delivery of healthcare, and granting people the right to take healthcare, forcing healthcare providers to fund the delivery of healthcare to the poor and needy. For example, in 1986 Congress passed the Emergency Medical Treatment and Active Labor Act^[vii] that requires hospitals to provide services to patients who show up in emergency rooms without regard to whether the patient can afford to pay for the healthcare services. In this situation, healthcare is literally free for many patients—but very costly to hospitals. Having to bear uncompensated costs suppresses hospitals’ ability to produce and innovate healthcare.

That some people cannot afford healthcare is a welfare problem; it is not a healthcare problem. There are good ways to address welfare problems and good ways to address healthcare problems. Treating both problems with one policy (forcing the healthcare system to handle welfare system problems) is extremely suboptimal. Welfare problems are public problems, and funding of alleviation of welfare problems should be fairly allocated among all members of the public. In particular, the cost of such funding should not be arbitrarily and irrationally dumped on one segment of the public, e.g., the healthcare industry. Doing so is fundamentally unfair and economically foolish.  Forcing one sector of the economy (healthcare providers) to bear a disproportionate share of the burden of a public problem unfairly punishes the industry that is producing the goods and services the poor need. It makes no sense to make more expensive (as discussed in PART I) things that poor people cannot afford^[viii].

The original governmental sin with respect to healthcare was an unintended consequence of wage and price controls imposed by FDR during WWII. Shortly after the adoption of those controls, the National War Labor Board exempted employer-provided medical insurance from the price controls.^[ix] The inevitable consequence^[x] was that competition among employers to hire good employees caused employers to offer prospective employees more healthcare benefits. This lead to the disaster known as “employer-provided health insurance.”^[xi] To understand why this is a disaster, a brief general discussion of insurance is needed.

Insurance companies generate profit (stay in business) because over the long haul, total premiums paid to an insurance company for insurance protection are more than the total amount of insurance benefits the company is likely to pay (it is similar to how casinos set the odds so the house wins on average—some people win, but most people lose). Consequently, on average, purchasers of insurance lose money when they buy insurance. It nevertheless makes sense to buy insurance to shield the purchaser from the costs of risks (possible financial hits) that the purchaser would not be able to absorb in stride. The insured purchasers are paying the insurance company to absorb certain possible financial hits. Collectively, the people who buy insurance pay high enough premiums to cover 1) the total amount the insurer will pay to cover the actual losses collectively incurred by their customers, 2) the cost of the insurance company’s employees, buildings, taxes and other business costs, and 3) a reasonable profit for doing all of this. (On average, healthcare insurance providers keep about 20% of what they receive in premiums; i.e., insurance purchasers should expect to pay a 25% premium for anything purchased with insurance.^[xii]) Because insurance is, on average, a losing proposition for purchasers (they can expect to get back, on average, only about 80% of what they paid in), people should buy insurance only to cover expenses that would be extremely hard to handle if some bad event were to happen (why pay 25% extra for a toothbrush by letting an insurance company buy it for you?). Because of government laws and regulations, the healthcare insurance that people buy (or is bought for them by their employer—which reduces the amount the employee would otherwise be paid^[xiii]) typically covers costs that people could easily handle out of pocket if the event were to occur. The insurance companies love this because they make their markup on the cost of a lot of items that employees could more inexpensively purchase directly. Employees should hate this raw deal, but, for the most part, they are as oblivious to this as they are the negative consequences of nationalized healthcare.

Many people have the bizarre belief that the high cost of insurance is due to greedy^[xiv] insurance companies and high CEO pay. This is a bizarre notion because less than 5% of health insurance premiums go to fund company profits and around 1% to fund CEO salaries. The total profit of the entire healthcare industry as a percentage of industry revenue is about 2%. How much happier would people be if healthcare costs were lowered by a few percentage points? Not much. In short, the profits of healthcare providers and CEO salaries are a barely noticeable part of the cost of healthcare, and without profit and CEO pay, there would be no healthcare insurance.

The greatest confusion arises when politicians and pundits talk about “the cost of healthcare.” Sometimes they use that phrase to describe 1) the out-of-pocket expenses incurred by patients who get healthcare, 2) the amount companies pay to provide healthcare insurance to employees, 3) the amount healthcare providers must spend in order to deliver healthcare services, and 4) the amount of national resources spent on the purchase of healthcare. Of course, each of these considerations is completely different from all the others. Politicians and pundits rarely clarify which “cost of healthcare” they are talking about. The examples of why it is foolish for politicians and pundits not to be clear on the costs they are addressing are many and important.

Aiding and abetting this confusion is the fact that most people obtain healthcare insurance through their employers. Thus, most people consider their healthcare to be free after a copay and small deductible. They do not realize that the company would pay them more if it were spared the cost of providing health insurance coverage—in other words, it really is costing the employees, but they do not realize it, much less know how much it is costing them.

Because most people do not realize what they pay for healthcare (and doctors typically avoid talking about the cost of care), “the cost of healthcare” is a mystery to most people. All they seem to know is, some people get cheap or free healthcare and other people don’t. As a result, many conclude that access to healthcare is arbitrary and unfair. They seek and find arguments (there are plenty of charlatans who profit from spinning this yarn) as to why healthcare should be provided to everyone at very low cost or free. They falsely assume there is no cost to relying on others to pay for healthcare. These confusions and the popular desires derived therefrom have been ripe for exploitation by politicians. Many politicians have been elected by promising to fulfill these misguided and confusion-induced, fantasy-based desires.

Everyone who understands basic economics, however, knows there are huge costs to everyone now (which will grow even higher in the future) when too many resources are extracted from wealth-producing activities and spent on wealth-consuming activities.^[xv] (For more information on this topic, see “Wealth,” “Income Inequality Is More Than It’s Cracked Up To Be,” and the last endnote of PART I, Endnote #5.) For most of America’s history, a significant majority of people have understood and believed that ideals of individual liberty achieve better results for “We the People” than collectivist (socialist) ideals. However, “progressivism”^[xvi] has risen up to oppose the ideals of individual liberty and promote collectivism, and progressives have gained much ground in convincing Americans that socialism achieves better results than individual liberty. The driving force behind socialism is politicians’ desire for power. Those desires are fulfilled by convincing people they will be better off if politicians and their minions (bureaucrats) control what people do, and to the extent possible, think. A primary tactic to convince people to go along with their aggregations of power is to exploit people’s envy and desires for something for nothing, and to confuse the economic reality of the proposals to deliver on their promises. One of the biggest power grabs of all is otherwise known as “Obamacare.”

The Holy Grail of progressivism has long been to gain control over people’s health. Obama’s goal has long been for America to have a single-payer system, but during his presidential campaign, he sugarcoated his position because he knew “single-payer” (socialized medicine) was unpopular with too many Americans. With control over who gets and who is denied healthcare and in what amount, the government will gain extraordinary control over the People. Unlike other socialist regimes that starve, exterminate, or “disappear” people who cling to their ideals of individual liberty (i.e., who refuse to become the “New Man” essential to a collectivist society), governments with control over a person’s healthcare can “nudge” (with the denial of healthcare) people in a way that causes them to leap to go along with the program.

The confluence of 1) a public that is more receptive to socialism than ever before and 2) a charming, funny, smart-appearing and masterful guy becoming president were the key ingredients to setting up what will likely be the coup de gras on individual liberty and the triumph of socialism (which will last until it collapses, as it invariably does). In other words, with the adoption of Obamacare, the progressives have very likely already won the struggle against those who oppose socialism. Progressives need not engage in overt acts of tyranny to impose a single-payer system because all the dominos to achieve that result have been put in place with Obamacare. A monumental change in beliefs away from socialism by a majority of Americans is the only way to avert the impending disaster. (Among many other negative consequences, a single-payer system will mean that Lord Acton’s observation that “Power tends to corrupt and absolute power corrupts absolutely” will be in full swing. Controlling people’s access to healthcare is close enough to absolute power for government work.)

The genius of Obama’s approach was to accept any bill that would result in a new universal entitlement to healthcare. Obama knew, as Jonathan Gruber so infamously disclosed, that even in 2010 the anti-socialist psyche of a majority of Americans would block a direct leap to single-payer healthcare. So, Obama actively deceived the American people about what the Affordable Care Act would do (e.g., telling them it would lower their premiums, and that they could keep their plan and doctors, etc.). The whole Rube Goldberg mess was made to appear to be an extension of the existing healthcare insurance approach to providing healthcare funding. Obama need not, and therefor did not, care much about the details of the Affordable Care Act—recall how he let Congress devise the bill. Even the Speaker of the House, who was the driving force in the House to get the bill passed, could not explain what was in the bill. More important, the details of the entitlement were not important. The only object was to pass a bill that contained a universal entitlement to healthcare. The Democrats strongly (and apparently correctly) believed that if Americans were given any entitlement to healthcare, it would eventually lead to universal, government-controlled and provided healthcare. Holy Grail achieved!

SO, WHAT IS WRONG WITH NATIONALIZED, “SINGLE-PAYER” HEALTHCARE?

Among the reasoned objections to universal single-payer (government-run) healthcare are these:

1. Government-run services are of relatively poor quality, officiously delivered, and inefficient (for example, see government healthcare offered by the Veterans Administration and Indian Health Service). See also:  Single-Payer Health Care: America Already Has It.
2. Because free or nearly free, government-run healthcare always and everywhere creates more demand for healthcare than the system can provide, healthcare must be rationed. This takes the form of long waiting lines (except for the powerful) or deferring or withholding services deemed by bureaucrats to be low priority or not worth the money (and “the system’s” priorities and value judgments are usually different from the patient’s priorities, but in socialized medicine, the patient’s priorities and values).^[xvii]
3. Socialized healthcare systems generally do not provide the latest and greatest treatments and drugs because they cost more than the system can afford.
4. Refusing to buy the latest and greatest technologies from their developers means less profit can be made by creating better treatments and drugs, and money for researchers dries up as well. (This would be a huge problem for everyone in the world because the U.S. is the preeminent source of medical research and development in the world, and there is no other country in a position to take over U.S. leadership in this area. All the other countries are either too poor or are so involved in redistributing their wealth that there is little left over to fund such activities^[xviii].)
5. Payments to healthcare providers are cut as costs mount. Cuts in payments to providers result in fewer people wanting to pursue careers in medicine and research, development and production of medical innovations slow. (This is especially bad for our children and grandchildren.)
6. The decision of whether a patient gets healthcare (i.e., control over quality of life, as well as life-and-death decisions) will be made by bureaucrats (and granting or withholding of healthcare will be used to gain political advantage for the party in power—see the Lois Lerner Tax Scandal).
7. Because employer- and government-provided health insurance already insulates people from the cost of the medical services they consume, people are freer to have unhealthy eating habits and lifestyles (and greater insulation from the cost of bad habits and unsafe behaviors can lead to more such behaviors).
8. Providing healthcare to millions of people with preexisting conditions is extremely expensive, and the country is already in debt to the tune of about $20 trillion, has unfunded future commitments of several multiples of that number, and is going further in debt daily—plus, taxes currently being collected are a huge drag on the economy that inhibits job creation and wealth creation. More government entitlements will only make these matters worse.
9. Fouling up the healthcare delivery and innovation system to address a welfare problem is a bad idea.
10. There are better approaches to lowering the costs of healthcare. (This will be discussed in PART III.)

WHERE DOES THIS LEAVE US?

Given all of the above, all appears to be going in accordance with Obama’s plan. The belief that Obamacare is not working and is not delivering the promised entitlements at the promised costs is essentially universal. Trump’s statement, “Obamacare will soon implode and then explode” is surely as correct as such a curious statement can be. Obamacare provided coverage for people who could not afford healthcare insurance, and for those who could not get insurance because they had preexisting conditions. The stated theory of Obamacare was that the funding to provide health insurance to those who could not get health insurance would come by forcing wealthier and healthier people to buy insurance coverage they could not use at higher prices than their health risks warranted (or to be fined or taxed if they refused to go along with the program). That all of this was a smokescreen to get the bill passed was made clear when Obama authorized wavers and delays in most of the negative consequences in the bill. Obamacare was designed and implemented to fail so as to hasten the day Americans would demand a single-payer system.

For years Republicans have been passing Obamacare repeal bills knowing that Obama would veto them. That political posturing worked great for them politically so long as a Democrat in the White House would veto their bills. Now that they have the power to repeal Obamacare, will they? Surely not (though they may rearrange some of the chairs on this Titanic while retaining that which is causing it to sink, the healthcare entitlement). Regardless of how terrible the bill was for the People as a whole and all their descendants, and everyone else in the world, for many practical and political reasons, a repeal without a replacement that retains the healthcare entitlement would currently be too politically risky for Republicans.

It was fun watching the Republican dogs running after the Obamacare car when they were sure they would never have the power to catch it. Now that they have caught the car, they have no idea what to do with it.

Repeal would mean that millions of people who currently have Obamacare insurance would lose their coverage. Once the fines in Obamacare are abolished, people would not continue to buy overpriced policies and insurance companies could not afford to provide coverage free. Many of the 11 million or more people who bought Obamacare “insurance”^[xix] were people with preexisting conditions. No company would sell them real insurance for the same reason Allstate will not sell fire insurance to anyone whose house is currently on fire.^[xx] Making matters worse, millions of people with preexisting conditions lost their employer-provided healthcare coverage when Obamacare became law. For the most part, the only insurance available to these people was Obamacare insurance. In short, Obamacare vastly increased the number of people who are not insurable without subsidies.^[xxi] Overall, 27% of Americans have a pre-existing condition. A large portion of those people would not be able to buy insurance without a government subsidy. It is not reasonable to believe that Congress will pass a bill that takes away astoundingly cheap or free healthcare from tens of millions of people who gained it via Obamacare—especially those who lost their healthcare by virtue of Obamacare. Republicans (probably accurately) believe they would never win another election if they did so—especially if they do not convince the American people of the benefits of avoiding nationalized healthcare.

Much of what Republicans do say about Obamacare is certainly correct. For example, Obamacare is a job-killer, a huge damper on economic activity, and way too costly. Because insurance companies are fleeing the system, it will collapse of its own weight, it might take America’s economy with it, and it will hurt our children and grandchildren. For the reasons discussed above, the cost of healthcare will continue to rise as more and more people survive to live for another medical intervention in the future. These rises in costs can (and will likely) be funded by shutting off funding for medical innovation and lowering the quality of care. That has been the history in essentially all places that have socialized medicine. (Eldercare is likely to be the first to be restrained.)

There is a big difference, however, between America nationalizing its healthcare system and all the other national healthcare systems around the world that have piggy-backed essentially free on America’s research, development and production of new medical treatments and drugs, thereby lowering their costs and improving their results.^[/xxii] That manna from heaven will no longer be able to shower those benefits on all countries, including America, once America’s healthcare is nationalized.

As bad as Republicans have said nationalized healthcare is, Trump, and now Ryan, have made matters worse by saying about healthcare that “We are going to take care of people.” Those words are indistinguishable from what Obama might have said. Most Republicans are so afraid of the public on this issue that they cannot even address the real issues, much less make the case against socialized medicine (their attacks on intricacies and adverse consequences of particular aspects of Obamacare is just making self-serving noise). Most of them continue to confuse healthcare and welfare, and, as a consequence, are proposing things that will foul up healthcare to “solve” a welfare problem. All but a few Republicans are basically saying we are going to continue the socialization of medicine, but we are going to remove the things about it that people do not like, i.e., paying for it. This approach will put America deeper in debt, suppress further research, innovation and development of medicine and make America’s economic woes worse—the opposite of what they have always said they stood for. (Why people thought Trump was either conservative or libertarian is a mystery to me.)

The country (and the world) cannot afford^[xxiii] the healthcare subsidies as they are today under Obamacare any more than it can afford all the other things that created the nearly $20 trillion and growing debt. The uniformed or misinformed American people, however, will not let politicians turn off the spigots (heck, they want tax cuts too). Hopefully, this blog will help inform and convince people of what the issues are and how they are not being addressed by our politicians.

If your goal is to bring the power and influence of America on the world down to an equal level with the power and influence of other countries (a manifestly obvious goal of the Obama administration), Obamacare was a huge step in that direction. If you believe, as I do, that making America weaker, less innovative and productive, and less prosperous is not a good idea for us or the other people of the world, please help me spread the word.

In PART III of this series, I will discuss alternative approaches to this very real problem.

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^[i] For those who assume that today there is enough redistributable wealth to fund all the current desires for healthcare (something that I believe is a false assumption), I urge you to think about two things: 1) What happens when the formerly wealthy are no longer wealthy, as taxes drain away both the wealth they had and the motivation to produce more wealth? and 2) As even more effective and valuable healthcare enables people to live long enough to consume more healthcare in the future than they do now (because new treatments in the future allow them to survive things that would have killed them today), from where is the extra wealth to fund those additional healthcare costs going to come? (There is no reason to believe it will come from the anemic economy that will be much more similar to the economies of those countries that have nationalized healthcare.)

^[ii] As for the tradeoffs implicit in various policies with respect to healthcare, see PART I of this series.

^[iii] For example, it is good to share what one has with others. If, however, people share so much of their wealth that they too become wards of the state (e.g., they can no longer afford the cost of transportation to get to work, or become so financially strapped that they become depressed and unproductive), doing good creates more harm than good. As this applies to the state, if the government spends so much on one thing (e.g., national defense) that it cannot afford other things of high value (e.g., healthcare), it very well could be that the spending on one thing makes things worse overall. (On the other hand, matters could be worse if the benefits of national defense outweighed the benefits of healthcare and all the nation’s wealth were spent on healthcare. For example, a case can be made that it would have been immoral for the country not to fight another Nazi “Deutschland Uber Alles.”)

^[iv] Another sad reality is that because politics require politicians to say things that are not true, the people who seek office tend to be those who are fine with lying or are too dumb or misinformed to know they are not telling the truth.

^[v] The venality of half-truths was discussed in my blog post “Truth Is Hard For The New York Times.”

^[vi] Some will object to my reference only to income taxes. My reference here is to federal taxes because this is a discussion of federal healthcare policy. The objection would be that payroll taxes disproportionately negatively impact non-rich employees. This is an invalid objection for two reasons:

1) Income taxes provide general funds to be used as politicians see fit. The income-taxpayer has no claim to get any of that money back. On the contrary, most of those funds are used to fund redistribution programs for which few employees are entitled. By contrast, payroll taxes are perceived to be used to fund direct benefits back to the payer of payroll taxes. So far, because that perception overrides reality, it is true for practical purposes.

2) “The rich” are entitled to a smaller percentage of the payroll taxes they pay than everyone else, and, unlike everyone else, their social security benefits are subject to income taxes.

In short, payroll taxes are like forcing employees to buy an insurance policy that will be a good deal if they live long enough. There is essentially no similarity between buying a contingent personal benefit (with payroll taxes) and paying for the general welfare of the nation (with income taxes). It is false to assume otherwise.

^[vii] The emergency departments that accept payments from Medicare to provide an appropriate medical screening examination (MSE) to individuals seeking treatment for a medical condition, regardless of citizenship, legal status, or ability to pay. There are no reimbursement provisions. Participating hospitals may not transfer or discharge patients needing emergency treatment except with the informed consent or stabilization of the patient or when the patient’s condition requires transfer to a hospital better equipped to administer the treatment.

^[viii] Another example of such folly is minimum wage laws that punish (by forcing employers to pay workers more than the value of their work) only those companies that produce jobs that low-skilled workers need. Wouldn’t it be better to facilitate rather than suppress the growth of those companies? What are we thinking?

^[ix] The costs incurred by companies in providing employee benefits are tax-deductible by the employer and not treated as income to the employee. In light of this tax treatment, when people buy medical insurance themselves, it becomes excessively expensive.

^[x] Given progressives’ quest for ever more control, there is reason to suspect that FDR intended this consequence, but a quick search for evidence that this was the case has produced none. I’ve even found assertions that this result was not intended, but those assertions appear to be based exclusively on official pronouncements (propaganda?). I would appreciate a reference from anyone who has knowledge on this subject.

^[xi] Wage and price controls and their implementation caused employers to get involved in healthcare insurance. See THIS for more details.

^[xii] If your $100 prescription is to be paid by an insurance company, the insurance company will charge a premium that results in it keeping 20% of what you paid. This means the insurance company will charge you $125 to pay for your $100 prescription because 20% of $125 is $25 (leaving $100 left over to pay for the prescription). This means you paid $125 for a $100 prescription. This is a really bad deal if you could have afforded to pay the $100 in stride. It can be a good deal if you would be financially ruined to pay the $100.

^[xiii] In order to hire employees, employers must compensate employees in an amount approximately equal to the expected value of their work. (See my blog, Greed.) Under the current way of doing business, some of that compensation comes in the form of pay and the balance comes in the form of benefits. If benefits are reduced, pay must go up or else employees will be compensated less than they are worth. If an employer tries to compensate employee less than they are worth, the employees will take jobs with employers who will pay them what they are worth. So, in a very real sense, employees incur the cost of their benefits with reduced pay. To the extent that the benefits include paying for insurance that is a bad deal (in that it covers expenses that could be handled in stride), employees are getting a raw deal.

^[xiv] Why greed is not a significant driver of profits was explored in my blog, Greed.

^[xv] Clearly some healthcare spending facilitates greater wealth creation. For example, the work done by a highly productive employee after she goes back to work will more than offset the cost of healing her. Also, spending money to heal people is valuable in and of itself, and cannot be discounted. There is a huge difference in the prosperity and wellbeing of the People when people’s wealth is spent on wealth-consuming activities rather than on wealth-creating activities.

^[xvi] “Progressives” have operated under this ambiguous moniker because to operate under a more honest banner (“socialist”) would have gotten them nowhere. Opposition to collectivism was too ingrained into the American psyche. As “progressives” implemented their collectivist policies, the horrors of collectivism unfolded. Rather than trying to defend the horrors—but wanting to continue their quest to have government run as much as possible— progressives changed their moniker to the venerable word “liberal,” despite the fact that most of their ideals are antithetical to what “liberal” had traditionally meant (i.e., another deception). Whenever the odor of the policies under one banner grow too malodorous to continue operating under that banner, they switch to the other banner.

^[xvii] Sarah Palin has been much ridiculed for her use of the term “death panels” to describe the fact that bureaucrats will decide whether “the system” will spend money on a particular patient (assuming the patient has not already died while waiting in a queue). In some cases, the withholding of services will mean that someone dies sooner than would be the case if additional healthcare were supplied. The details of how services would be rationed were intentionally omitted from Obamacare because, as Jonathan Gruber, an advisor to Obama, said, “[Why should we deny healthcare to everyone because] we don’t yet know how to control costs in a politically acceptable way? Let’s get the people covered, and then let’s do cost control.” (If you do not like the term “death panels,” come up with your own term for what will inevitably happen with single-payer healthcare.

^[xviii] What makes this result inevitable in socialist countries is that once the principle that government can and will give people stuff if they demand it vehemently enough, then no matter how much government is already giving people, there is a never ending demand for even more stuff. Given that those demanding more feel no need to consider the cost of the “free” stuff (apparently assuming the stuff is funded by unicorn poop), people remain perpetually indignant that government ever holds out on them, i.e., never happy. As a consequence the government is perpetually broke and has too little money to do that which it should do, and woe be unto any politician who suggest government cuts back on any of the stuff.

^[xix] While what they bought is labeled “insurance,” those policies issued at little to no cost after the Obamacare subsidies were really disguised welfare payments to people whom the act deemed to be poor.

^[xx] Note that is not the insurance company’s fault that the person needing healthcare (or to have their burnt house replaced) are in that condition. They are in the businesses of selling a product that people want and need to protect themselves in the event people find themselves in those conditions in the future. Moreover, people who have a preexisting medical condition don’t need healthcare insurance; they need money to buy healthcare. Friends, family, charities, and governments hand out money to people expecting nothing in return. Businesses cannot do that and continue to provide their products to people who need them.

^[xxi] Normally subsidies work like this: Taxpayers and buyers of bonds pay money to government. Government gives that money to people or companies who are entitled to subsidies. “Subsidies” in the Affordable Care Act (Obamacare) do not fit that description. Obamacare “subsidies” are funded by purchasers of insurance, not taxpayers and bond holders. Purchasers of healthcare are forced to pay an amount equal to what their insurance would cost the insurance company, plus an additional amount needed to fund some or all of the insurance poor people and people with preexisting conditions would get under Obamacare, or pay a fine or tax to fund other people’s insurance. This is all a ruse to get people to believe that Obamacare will not make the budget deficit worse. None of the numbers worked out when Obama delivered benefits on schedule and deferred the requirements to fund the benefits.

^[xxii] Have you noticed that the same drugs in foreign countries are much cheaper than they are in the U.S.? That is because foreign healthcare agencies can, with credibility, say that if the drug companies do not sell the drugs at slightly above the cost of manufacture, they simply will not make those drugs available to their people (i.e., they will not buy them). The drug companies can make a little profit from sales to foreign governments, which is better than foregoing that profit. But the amount those governments pay is too little to fund the cost of research and development of new drugs. Because the higher costs charged to Americans are worth the benefits from the drugs and they can afford them, Americans fund most of the research and development of new drugs that is done in the world. In short order, a national healthcare agency in America will also have to cut what it pays for drugs. American R&D will then look like the R&D in the rest of the world, much to our and the world’s chagrin.

^[xxiii] What “afford” means in this context will have to be the subject of another blog. The last Endnote of PART I, Endnote #5, however, provides some highlights.

The U.S. healthcare system was unsustainable before Obamacare and is even less sustainable with Obamacare. The implosion of Obamacare is happening before the eyes of anyone who is willing to look. The nation is at a crossroads: The nation will turn to either a collectivist “solution” or a more free market “solution” to deal with the demise of Obamacare. The quotation marks around “solution” are to imply that neither approach will solve all of the problems of healthcare. Each presents a different set of tradeoffs. The issue before the House (and the Senate and the nation) in which direction we should take. The answer will be momentous.

The issues that must be understood to make a sound decision about healthcare are many. Why are both the pre-Obamacare approach and the Obamacare approach to healthcare so unsustainable? Why is there mass confusion about what to do with U.S. healthcare? What are the tradeoffs of both paths? All of these issues desperately need to be sorted out, and this topic is too large to cover in one blog post.

This is the first post of what is planned to be a three-part series. Part I explores why the pre-Obamacare approach and the Obamacare approach to healthcare are unsustainable (the understanding of which is essential to responsibly support any healthcare policy). Part II will explore how politicians and pundits are confounding a clear understanding of what is at stake with changes to healthcare. Part III will explore a better approach to dealing with healthcare.

Let’s get started.

Everywhere and always, people’s needs and ability to pay for healthcare varies from one person to another. Much has changed about healthcare over time, especially its effectiveness, its cost of delivery, and the skills needed to deliver it. Another important change is the growing sentiment that people’s access to healthcare should not be limited because they cannot afford healthcare. In light of the greater wealth today, the growth of those sentiments is understandable, but the extent to which and how they should be delivered are the key issues. The rationales for and benefits of greater access to healthcare are well-chronicled. Understanding “the cost of healthcare” is as essential to a good policy as understanding the benefits. The public discussion of the costs of healthcare is mired in confusion, however. The following discussion will hopefully bring some clarity to the subject.

Neither politicians of any party nor the press are telling the people about the real issues and problems of Obamacare. Most of the statistics they site to compare the U.S. healthcare system to universal healthcare systems are bunk.^[i] Essentially, every discussion of the cost of healthcare confounds the important difference between the cost paid by a patient for healthcare or health insurance with the cost of delivering healthcare. I fear that the more that people listen to the confused public debate about healthcare costs, the more misinformed they become. Supporting a particular policy without a reasonable grasp of its positive and negative consequences is both irresponsible and foolish. Teasing out the real and hard issues about healthcare from what you hear from Washington is essential to deciding which policy to support. Let’s try to sort this out.

We should start with the basics, first taking the perspective of healthcare providers and then the perspective of healthcare consumers. Healthcare insurance (how the costs of healthcare are now managed) is a different subject that will be discussed later.

PROVIDERS: For there to be healthcare, people must produce healthcare. Therefore, the producers of healthcare must be paid enough to induce them to produce it. The more profit that can be made from producing affordable healthcare, the more healthcare will be produced; and the greater resources and incentives there will be to improve healthcare goods and services. Just as important, the less profit that’s available from the innovation and provision of healthcare, the less innovation and provision there will be.

Unless healthcare providers are subjected to competition from other providers, either the prices charged for healthcare will be unnecessarily high (because they can) or third parties must be employed to control prices. This adds layer upon layer of costs and disincentives to be in the healthcare provision business. Before you know it, doctor and nurse shortages, delayed or denied treatment, patient inconvenience, and corruption (the administrators see that their interests are richly served at the expense of the patients and healthcare providers) become an ever-growing problem.

CONSUMERS: From the healthcare consumer’s perspective, when a person or her family needs healthcare, few things are as important and pressing as acquiring healthcare. Consequently, people are willing to give up or forego many other things when a family member’s health is in jeopardy. On the other hand, everyone prefers to give up as little as possible to gain the things they want, including healthcare. In addition, while people are willing to give up a lot for healthcare, they generally are not willing to give up everything they have for healthcare (and buying health at a cost that leaves no money for other things, including food, shelter, or clothing, can be a bad choice). Additionally, the most important economic consequences of this are: 1) the less a person must give up to get the things she wants (e.g., healthcare), the more of those things she will consume, and 2) on average, the more things people have to relinquish in order to acquire healthcare, the more likely they will be to do what they can to avoid the cost of healthcare (including adopting healthier and safer lifestyles), i.e., the less healthcare they will consume. (Note: Politicians urging universal healthcare ignore the increased demand consequences of lower costs and tout the drop in demand that results from higher costs when one or the other servers their political interests. Compare the discussion of demand when touting universal healthcare to when they tout extra taxes are imposed on cigarettes – to encourage lower consumption of cigarettes.)

THE CONSEQUENCES: If unicorns dined exclusively on rainbows and pooped money and the government had a large enough stable of unicorns, the fact that neither the pre- nor post-Obamacare systems did much to induce less demand for healthcare would be a non-issue. The government would just make sure it had a large enough stable of unicorns to induce healthcare producers to produce enough healthcare. Inasmuch as the cost of healthcare is huge and there are no unicorns, however, what the government does with respect to healthcare has a huge impact on the cost of delivering of healthcare, the pace of innovation in drugs and medical treatments, and the economies and people’s health in the U.S. and around the world. This means that we had better come up with a good set of tradeoffs.

The immutable reality of healthcare is that the demand for partially or fully subsidized healthcare (nearly or fully free healthcare) is exceedingly high while the amount of healthcare that will be produced free or nearly free (or even below the cost to produce it) is exceedingly low. The same is true of food. A big difference between the purchase and sale of food and healthcare is that food is, for the most part, purchased in a vastly freer market: i.e., there are many fewer subsidies for and government tinkering with the manufacture and delivery of food than the same for healthcare (and subsidies are only available for poor people and are funded by general government funds instead of other purchasers of food insurance). Food transactions are between the buyers and sellers of food – with the buyer bearing the costs of her decisions as to what she can and should afford. (Other big differences exist, but they are not relevant to this discussion.) While some people shop for food at Walmart and others at snooty gourmet stores, for the vast majority of people, there is a large supply of life-sustaining food at prices they can afford. For those who cannot afford food, there are charities and welfare programs to address that problem. As a result, obtaining food is easy and reliable because food is accessible and affordable to everyone (or to as close to everyone as the government can be expected to achieve). Most important, the quality, variety, accessibility, and store environments have improved over time while the cost as a percentage of household budgets have gone down.^[ii]

The salient point of the previous paragraph is that the country has not messed up its food delivery systems by turning them into welfare programs. The food delivery system works much better than the healthcare system because the government has stayed out of the production and delivery of food to a significantly greater extent.

So, for some inexplicable and serendipitous reason, politicians appear to understand that not being able to afford food is a welfare problem rather than a food delivery problem. As a result, they have kept their fingers off the delivery of food. (Some of any money that passes through the government inevitably sticks to the fingers of politicians and bureaucrats. See “Siphoning” below.) For an all-too-explicable,^[iii] invalid, and/or corrupt reason, however, politicians have treated the problem of people who cannot afford to buy healthcare as a healthcare delivery problem, i.e., not the welfare problem it actually is. The confusion of healthcare with welfare by politicians and pundits has mired us in nearly hopeless confusion and bad public policy and policy proposals. If Americans do not wise up to this confusion, things will continue to get worse.

In sharp contrast to food, most purchases and sales of healthcare take place in highly regulated markets in which intermediaries (insurers, employers, government bureaucrats, and politicians) involve themselves in the acquisition and delivery of healthcare. So, unlike freer market transactions, the cost of “healthcare” includes payments to multiple intermediaries who are not providing healthcare. All of these third parties add thick layers of costs to the cost of purchasing healthcare.^[iv] That adds greatly to the cost of healthcare. That is only one of many problems with the government’s involvement with healthcare.

Perhaps the biggest issue is that it reduces the amount of money received by the healthcare providers. This is a problem because, with less money to be earned from providing healthcare, less healthcare is produced, i.e., healthcare is scarcer than it would be without the intermediaries. The scarcer something is relative to the demand for it, the higher its price will be. (No man-made law can overcome this immutable law of economics.) So the presence of intermediaries not only adds layers of costs, those costs are layered on top of artificially heightened prices because of the siphoning of money to intermediaries.

Siphoning: Another big problem is that, when the government sets the rules of money flowing from some parties to others, how these rules are written and enforced makes a huge difference in where the money flows. When the government controls the flow of money, it can be profitable for business people to do what they can to cause lawmakers and regulators to make and apply rules that send more money to their businesses. The government exercising power over the flow of money not only invites corruption and costly lobbying, but it also welcomes and encourages it. Business people paying politicians (via campaign contributions or otherwise) increases politicians’ chances of getting reelected. The richer the big companies become, the more money they will have available to give to politicians. This creates an unvirtuous cycle by causing politicians to do even more favors to induce more campaign contributions. The accumulation of special advantages from regulatory schemes confers monopolistic powers to large healthcare companies (enabling overcharging) – which leads to more healthcare money being siphoned off from the provision of healthcare to company profits and campaign contributions. The more the government gets involved in healthcare, the more healthcare dollars get siphoned off to things other than providing and inventing new and better forms of healthcare. In short, government involvement greatly increases the cost of healthcare and reduces the improvement of the quality of healthcare.

The artificially high demand for healthcare caused by subsidies to patients^[v] also artificially increases the cost of healthcare. In a system in which 1) people rely exclusively or to a great extent on others (e.g., employers or the government) to pay for their healthcare and do not directly bear (or even perceive) more than a small fraction of the total cost of providing the healthcare they consume, and 2) much of what they pay for healthcare does not reach the healthcare providers (because of siphoning), people’s unconstrained demand for healthcare will always be greater than the constrained supply of healthcare. (The supply of healthcare is constrained by the fact that providers must be paid in order to buy and maintain equipment and facilities and hire highly skilled people to provide the healthcare.) This causes the cost of healthcare delivery to increase because of the excess of demand for services relative to the supply of people willing to provide services for what little is left after all of the siphoning.

Note that whether people do or do not have a “right to healthcare” is irrelevant to the economics concerning the provision of healthcare. The immutable economic reality is that if healthcare is to be provided, the money needed to produce its production must be paid for with funds that could be used for other beneficial things. If the costs of healthcare are unnecessarily high, the amount of money that must be withdrawn from wealth-creating activities and spent on wealth consumption increases. As discussed in my blog on “Wealth,” shifting resources from wealth creation to wealth consumption slows the rate of wealth creation, and slowing the pace of wealth creation creates a separate set of problems both in healthcare innovation and elsewhere.

In short, the cost of spending money on healthcare is exceedingly high, especially in terms of the kind of world we will deliver to our children and grandchildren and their children and grandchildren. Not only will the national debt that is passed on to our children be higher than need be, spending on the consumption of overpriced healthcare diverts money that would otherwise be used to invent and develop better medical treatments and other life-enriching things. Given the negative consequences of policies that result in spending more than is necessary for healthcare, supporting policies that cause the cost of healthcare to be higher than it needs to be is selfish and unwise.

STRUCTURAL REALITIES OF HEALTHCARE: With the background presented above, we can now turn to longer-term structural issues related to healthcare that are being unaddressed with the current debate.

To induce people to endure the many years of study and preparation and constant updating required to be a good physician; to pay for medical research and the development, manufacturing, and delivery of new methods, devices and drugs; and to pay for the buildings, equipment, and staff to provide that healthcare takes a lot of money. A government system that pays healthcare, and medical devices and drug providers less, will result in fewer people willing to invest in or do those jobs at a time when many more are needed.

Because regulatory hurdles are constantly being raised, the cost of introducing improved treatments and drugs, and the risks of being sued for malpractice or product liability to grow, the cost of inducing those activities has and will likely continue to increase. The ability of a patient to sue a government healthcare system for compensation for harm due to medical malpractice will surely be significantly constrained, if not eliminated entirely. The same will be true concerning suing drug companies if the government takes over the drug industry. That will both mitigate the need for doctors drug companies to be diligent, and do injustice to those who are rightfully due compensation—the negative consequences of which are incalculable, but surely large.

Funding for medical inventions is essential to improving the quality of healthcare, but it is very expensive. While the U.S. spends much more on healthcare than any other country (by almost any measure), it is worth noting that “The United States remains the world leader in medical innovation, having produced more than half^[vi] of the world’s new medicines over the last decade.” That Americans, who are less than 5% of the world’s population, invent over half of its medical innovations (which “gushes down” to everyone in the world) is not just remarkable, it is essential to making the world a better place for our children. Other countries have such dysfunctional economies or have redistributed wealth to such a degree that they cannot afford to fund their share of R&D in any field. If the U.S. does not continue to pay much more than the rest of the world for healthcare, the rate of improvements in medicine will slow vastly. Adoption of an even more nationalized/collectivist healthcare system in America might seem to be a small step, but it would be a giant leap backward for mankind.

So, the more that medical treatments improve over time, the more valuable and expensive they become, and the more people will want medical treatments. Because of the higher cost and value of these wonderful new treatments, there will likely be even more people who cannot afford to defray the cost of their delivery. From a national perspective, we must multiply these increasing costs by a growing number of citizens. Is any of the above a “healthcare problem”? No. It is a wonderful miracle and a blessing that medicine has so improved and that people can live longer, healthier lives. We must acknowledge, however, that these miracles and blessings to mankind^[vii] are and will continue to be a growing welfare problem. This welfare problem will be made more costly if we continue to confuse the issues concerning either healthcare or welfare.

Wealth is a key component in addressing societal problems.^[viii] In general, the more the government controls the economy, the less wealth will be created. Whatever wealth a country forces to be spent on healthcare will be money that is unavailable to spend on other pressing problems, e.g., education, environment, infrastructure law enforcement, welfare, national defense, the judicial system, unemployment compensation, Social Security, regulation enforcement, foreign aid, etc. Taxes and deficit spending suppress wealth creation. No one knows how many economically inefficient policies the U.S. can adopt before foreigners decide that the dollar is no longer the best currency to hold. We do know that every additional government grab of control over some portion of the economy brings the country closer to that point. If it is reached, at which point the dollar will no be longer the world’s reserve currency,^[ix] value of the dollar will tumble and the country’s ability to deficit spend will vanish and the government will lose its ability to sustain its spending. Government takeovers of huge portions of the economy is worse than playing with fire. (Soring out the villainy of politicians who conceal for their own political advantage the dangers to which they are exposing the American people will take a whole other blog series.)

In conclusion of PART I, any alternative to Obamacare that enables everyone to have whatever healthcare they want at little or no cost to them will be both unworkable and unaffordable^[x] and is funded and controlled by sticky-fingered politicians subsidizes unhealthy lifestyles, would 1) raise the cost of the delivery of healthcare, 2) suppress the amount of healthcare produced, 3) suppress the invention of better medicine, 4) allocate an unlimited amount of the nation’s resources to healthcare – whether or not there are more urgent need for that money, and 5) would bequeath to our children a drained economy loaded up with even more debt and unfunded promises.

So how are politicians dealing with this reality? Stay tuned for Part II.

This post was updated on 12/14/2019.

^[i] See “The Grass Is Not Always Greener, A Look at National Health Care Systems Around the World.”

^[ii] See “Your Grandparents Spent More Of Their Money On Food Than You Do.”

^[iii] Sadly, this is a politically acceptable (but deceptive) way for politicians to grab additional power for themselves.

^[iv] That most people get health insurance through their employers is the result of government policy. How detrimental and costly that way of purchasing healthcare is, however, is the subject of a future blog. Do note here that the cost of groceries would be considerably higher and more cumbersome if they were being purchased through intermediaries. Note also that: 1) Much of routine healthcare that could be purchased directly is currently being purchased through insurance companies – much of which is purchased by employers; and 2) The cost of medical procedures that are not covered by insurance (such as Lasik and cosmetic surgeries) has fallen rapidly over time as the quality of the results has improved. Compare and contrast that to healthcare bought through insurance companies.

^[v] Unlike most government subsidies, which are funded by general funds, the subsidies provided to those who cannot afford or are ineligible to buy health insurance through Obamacare are designed to force some healthcare insurance purchasers to pay for insurance coverage that they cannot use and to overpay for insurance that they could but probably won’t use.

^[vi] Though determining which country should get credit for an innovation is extremely complicated. See “Which Countries Excel in Creating New Drugs? It’s Complicated.”

^[vii] The medical treatments, devices, and drugs, most of which are developed by U.S. companies, eventually become available to people around the world. Without the fountain of U.S. medical research and development, most of the recent advances in medicine would not be available to anyone in the world. (Germany used to be the world leader in medical research, but the German medical industry has become too regulated and socialized to retain that position.)

Note also, much of the medical research and development in other countries is justified only by the expectation that wealthy Americans will pay market prices for the good ones (something their nationalized healthcare system will not do), i.e., those drugs would not be invented absent wealthy Americans willing to purchase them.

^[viii] See “Wealth.”

^[ix] See “Reserve Currency.”

^[x] By “unaffordable” I mean that the country will not be able to afford it. The federal government could not afford to do all that it was doing back when Obamacare was enacted (in fact, it was over $13 Trillion in debt and it was annually spending about twice the amount of tax revenue it was collecting – and none of its unfunded promises to pay even more in the future were not included in the national debt figure). Taxing more would suppress the economy even more. A suppressed economy would result in fewer jobs (when we need more jobs), which would lead to fewer taxpayers and more people in need of government help.

In many respects, the sun is awful. It can blind, cause cancer, burn skin, dry up lifesaving ponds, scorch the Earth, and inflict much other harm. However, as accurate as those horrible facts are, we would not fare well if the sun disappeared.

Similarly, income inequality is awful in many respects, but we would not fare well if it went away. An idea has set in across America that income inequality is one of our most pressing problems. Because the real and imaginary ills spawned by income inequality are incessantly chronicled,^[i] they need not be belabored here. Conversely, what is essential and positive about income inequality is rarely discussed. So, let’s sort out why income inequality is more than it’s cracked up to be.

While the point does not need to be elaborated before we delve into what is good about income inequality, it should be noted that some of its specific causes are irredeemably evil. For example, income inequality can result from theft, the government (or society) bailing someone out of an irresponsible risk, or enticing politicians to use public resources to grant special business favors. Income inequality resulting from those actions is unalloyed evil. These facts should not, however, be confused with the bogus Marxian notion that capitalists steal the labor of workers (the extent to which this exists is insignificant) or that there is something evil about making a profit.

As discussed in my blog on Wealth, wealth is not the be-all and end-all of human flourishing. On the other hand, compared to the number of problems that can be alleviated with money, those that cannot are relatively few. Consequently, wealth makes human lives less “solitary, poor, nasty, brutish, and short” than otherwise. Consequently, social norms and policies that facilitate and motivate humans to create wealth benefit human flourishing.

As with all human activities, there are dark sides to creating wealth. The news is constantly replete with examples; although many are figments of imagination, a few are real. The monumental inherent benefits of wealth creation are rarely chronicled. When a human creates something for $X that other humans value at $X + $Y, she has created wealth. When I say “value at $X + $Y,” I mean that there are other humans who would be better off if they traded $X + $Y for the creation rather than keeping $X + $Y in their pockets. People’s lives improve when they trade things they value less for things they value more, i.e., both parties are wealthier. Humans’ ability to engage in activities that serve others’ wants and needs while helping themselves is a wonder of nature. Trade is fundamentally good. The more trade there is, the more good there will be in the world. To trade, however, people must use their backs, brains, or both to produce something to trade.

Of course, the prospect of income or gain is not the only factor that motivates people to produce and/or invest. On the other hand, the prospect of acquiring significantly more wealth is a primary motivation for many (if not the vast majority) of the activities that produce wealth. Lastly, wealth funds the innovation, development, production, and delivery of goods and services that are more efficient, useful, and/or fun than the pre-existing ones. In short, wealth creation is a primary driver of human advancement and flourishing.

The simple but not obvious truth about income inequality is that it is the engine of wealth creation (prosperity). In fact, the greater the income inequality, the higher the engine’s horsepower, i.e., the more rapidly prosperity accelerates. (The extreme importance of the pace of wealth creation is also discussed in my blog on Wealth. In a nutshell, improvements in standards of living increase exponentially as the pace of wealth creation increases linearly.^[ii])

Why is income inequality the engine of prosperity? People get out of bed, go to work, and push themselves to be creative and productive because doing so will significantly improve their chances of better lives. Generally, the higher a person’s motivation to work, the more she will produce things other people desire. In a free market, the more people produce, the better off they will be. For the most part, the greater the actual and potential rewards from working, the greater people’s motivation to work is.^[iii] Such rewards include the pay earned for the work currently being done by the employee, the prospects of getting a promotion to a higher-paying job, the pride and dignity of pulling one’s weight, i.e., not being a freeloader, and being a benefactor for others. The higher the jump in pay from one job to the next, the greater a person’s motivation is to work hard enough to earn the promotion.

People earning more pay when they work harder have serendipitous effects on the prices of what’s available in the market. The more people produce (that is, increase the supply of things that other people want), the more downward pressure on prices and the greater the ability to lower prices becomes. As the prices of goods and services go down, more people will have money left over after buying what they usually buy. In other words, people become wealthier as prices fall. Furthermore, the more excess cash people have, the more they can afford (create a demand for) products they previously could not afford. This additional demand provides a reason for people to start new businesses or expand existing businesses, thereby creating more jobs (i.e., opportunities for people to be more productive).

The creation of more jobs has serendipitous effects on wages as well. As discussed in my blog post “Investment Income and Universal Basic Income Are Not ‘Basically The Same,'” a primary reason that the wages of middle- and low-income people have been stagnant for so long is that there has been a glut in the supply of low- and middle-income people wanting to work and a dearth of low- and middle-income jobs to absorb that excess supply.^[iv] (Supply in excess of demand pushes prices down.) Labor (wage) prices rise as the ratio of qualified workers per job decreases. With robust wealth creation, businesses will be started and expanded to absorb the excess supply of middle- and low-income workers. This is because having fewer qualified workers in the job queue forces employers to compete to hire scarce workers.

To sum up, the more people produce things their fellow humans value, the more wealth to invest in businesses there will be, and more jobs will be created. As wealth rises, more money becomes available to invest in existing and new companies to better serve humans’ needs and desires. The more new businesses there are, the more jobs companies will create. The more jobs there are, the higher the average income will be.

As you should now see, wealth creation enables a virtuous cycle. The motivation to work harder increases individual productivity, which creates more wealth for companies and allows the creation and expansion of businesses, which both lower prices by creating a demand for more goods and services (by freeing up the extra cash of existing workers) and create more jobs, which enables more people to work and creates more wealth. Repeat.

The preceding paragraphs discussed wealth generation from an economy-wide (“macro”) perspective. Let’s now turn our focus to wealth creation from an individual company (“micro”) perspective. Here, the prosperity engine’s “horsepower” is most clearly evident.

Companies must motivate their employees to work hard to create and produce. If a company’s competitors are better at motivating their employees, the less productive company will incur higher production costs and lose business to them. A primary means of motivating employees is monetary compensation. For monetary compensation to be an effective motivator, however, there must be a significant difference in compensation between one job and the next throughout an enterprise’s hierarchy.^[v] If there is no difference in reward, no matter how much value an employee produces, the likelihood of employees exerting themselves on the job will be lower. On the other hand, the extra work that people will put in to reach the next pay level increases as the extra income pay at the next level increases; for example, a person making $7.25/hour will work harder if doing so provides a reasonable opportunity to earn an extra $2 per hour rather than just an extra $1 per hour. In these instances, greater income inequality between one job and the next higher job will cause employees to work harder than in cases of lower income inequality.^[vi] For the same reasons, someone making $750K per year will be more likely to be more productive if she has a reasonable shot at an additional $200K/year than if the next level is just an extra $100K/year. The same is true for even higher incomes. Additionally, the greater the expected return on an investment, the more likely people are to invest in it. The more likely it is that the return on an investment will be reduced by taxes, regulations, confiscations, investigations, or lawsuits, the less likely investors will invest in a company. In short, the greater the gap between the rewards for producing more than alternative investments, the more likely everyone will produce more, and vice versa.

People should understand that most people give away a small portion of their wealth to serve their fellow humans. While it may be a higher percentage of their income than some wealthy people give, the per-person amount of money donated to serve public purposes is insignificant compared to the amounts of money that rich people donate for those purposes (e.g., Bill and Melinda Gates alone have already donated more than $27 billion and have pledged to give away much more for “agricultural development, emergency relief, urban poverty, global health, and education”). The only reason they can give away so much is that they created so much wealth (in addition to the wealth Bill Gates bestowed on millions of people by selling Microsoft products at prices below what those products were worth to them, and the wealth stolen from Microsoft through piracy). Unlike wealthy people, most people do not create ideas and run companies that create life-enriching jobs (financially and otherwise) for millions of employees, or produce tools that make people more productive (i.e., more valuable) in their jobs.

In conclusion, income inequality creates social ills but is also a key driver of wealth creation. Honest wealth creation benefits everyone, and income inequality is the engine of prosperity. The greater the income inequality, the higher the horsepower that the engine of prosperity will have.

POSTSCRIPT

None of this suggests that people work only for money or that money is the perfect motivator. On the contrary, the rewards of being productive come in many forms. Such rewards also add horsepower to the prosperity machine. Consequently, everyone should consider the effects of promoting or suppressing those other factors. That topic, however, must wait for another blog.

(I also recommend THIS SHORT VIDEO on income inequality.)

Further Reading:

• Insightful observations about the benefits of income inequality are delightfully presented in this article, “Surging Wealth Inequality Is A Happy Sign That Life Is Becoming Much More Convenient.”

^[i] For example: “Income Inequality: Too Big to Ignore” by Robert H. Frank. This is full of misguided nostrums that I might explore in a future blog. Most of Frank’s errors are captured by this sentence: “There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being.” There is plenty of persuasive evidence for those who do not have blinders to it. More importantly, however, immediately after making the second claim, Frank equates “well-being” with happiness. Frank falsely presumes that the goal of public policy is to make individuals happy. The goal of policy should be the improvement of the well-being of “everyone,” not “anyone.” For a different and more extended critique of Frank’s position, see or listen to THIS.

^[ii] Society’s willingness to accept income inequality alone will not result in wealth creation. Rapid wealth creation cannot occur in the absence of certain preconditions, such as the rule of law, reasonable safety, property rights, sufficient mutual trust among trading partners, and virtuous citizens. (Deirdre McCloskey’s work in this area is extensive and very compelling. Also, see THIS JOHAN NORBERG VIDEO.)

^[iii] Of course, there are many other motivations that cause people to create and produce. Despite that, the claim that people are motivated to work at higher levels in response to increased potential rewards is valid.

^[iv] Of course, there are many other motivations that cause people to create and produce. Despite that, the claim that people are motivated to work at higher levels in response to increased potential rewards is valid.

^[v] The reason that the pay for highly skilled people has risen relative to the pay for low- and middle-income workers is that investment money has been available to start highly promising companies. Every company needs highly skilled top executives, but not every company needs a large number of low-skilled workers. Technology can more readily substitute for the tasks low- and middle-income people perform than for the multiple, complex tasks top executives must perform. In other words, top executives only have to compete against other people, not robots, and there are relatively few people with the skills to perform those jobs well. As new companies are formed, the ratio of qualified top executives to top jobs has fallen, creating a continuing shortage of employees to fill them. Consequently, the value of top executive services keeps getting bid upward.

^[vi] There is an upper limit, however, to how much can be paid for a particular job. Rarely (if ever) would it make economic sense for a company to pay an employee more than the value of the employee’s work to the company.

For an example of what happens to the motivation to create for people at the top end of their incomes, see Stevie Nicks’s comments on the lack of sufficient profit opportunities for successful people who have proven their creativity and abilities. See also Mick Fleetwood on the same subject.

Updated 03/16/26

During the recent Oscars telecast, the New York Times (NYT) ran an advertisement entitled “The Truth Is Hard.” David Ruben, the NYT’s branding editor, said, “The idea [of running the advertisement] is to be a part of that discussion about what does it mean to find the truth.”

Reporting the truth is indeed hard, and it is often too hard for the NYT. The newspaper suffers from two common problems: reporting less than the whole truth and believing news that is not true.

Ideally people who want to add to “that discussion about what does it mean to find the truth” would be truth seekers. But for the NYT it is too hard to seek, much less report, more than snippets of truth that favor points of view the NYT wants to impart to its readers. Rather than informing readers about the all the salient facts of an incident, the NYT seeks and peddles anecdotes, i.e., half-truths.

For example, each of Barack Obama’s* policies as president had positive and negative consequences. Typically the policies had positive effects on some people and negative effects on others, but the net effects of a policy on the people of the United States and the economy on which they depend is often the most important part of the truth for a newspaper to report. Obama’s policies were usually great for the people whose stories the NYT reported. The positive effects of a policy, however, are not the whole truth and cannot be used alone to ascertain its merits. No matter how many positive anecdotes there are, a policy could be disastrous for many people and the country as a whole. Moreover, even if a policy benefits the majority of people in the short term, it may have net negative effects if it will wreak havoc on their children and their children’s children.

So when the NYT time and again truthfully reported only the positive consequences of Obama’s policies and omitted the negative consequences, it was telling half-truths. The whole truth proved to be too hard for the NYT, which you can count on to neither seek nor report the negative side of the policies and the people it supports. (On occasion, the paper will throw in tidbits about actual or possible negative consequence of a policy in order to create a patina of objectivity. Faint damnation, however, is as effective as faint praise in making a case.)

Inasmuch as the NYT opposes Donald Trump (both because it opposes Trump’s policies and because Trump calls out the NYT’s deceit by half-truths), the newspaper is now doing the reverse of its strategy under the Obama administration. It is reporting almost exclusively on the negative consequences of Trump’s policies and actions and omitting sufficient coverage of their positive consequences. Seeking, finding and reporting the facts needed to make a fair assessment is just too hard for the NYT.

The NYT’s claim that politicians should be held accountable is absolutely true, but this does not defend its biased badgering of Trump. To hold accountable only those politicians with whom the newspaper disagrees and to give politicians with whom it agrees free reign prevents readers from determining the whole truth. Demanding accountability from all politicians would be just too hard for the NYT.

In addition, the NYT buries the truth when it is not forthright with its mistakes. When the paper reports something that is not true on its front page and is compelled to write a retraction, it hides its corrections deep in the paper if the admission of error hurts its political objectives. Once the NYT has inflicted damage on its targets with false assertions on its front page, it makes it as difficult for readers to learn the facts as it can.

The advertisement the NYT ran was an effort to deceive rather than inform. For example, three seconds in the NYT repeated a palpably false meme it and its allies have been promoting. “The truth is alternative facts are lies.” You might tell me the sun’s rays are bad because they cause sunburns, but I could respond with the alternative fact that the sun’s rays are good because they help your body to produce vitamin D. Both facts are true; they are just alternative takes on real effects of sun exposure. Moreover, a lie is an intentional untruth. A person is not lying when she asserts an alternative fact before the person learns the asserted fact was not true, she is mistaken.  It is fake news to report that “alternative facts are lies,” but the NYT has repeatedly proclaimed this falsehood and pushed the slogan again in its advertisement.

Next in the advertisement, the words “The truth is” appeared and were followed by a long list of statements that were mostly opinions. The statements were not necessarily unsupportable opinions, but they were opinions nonetheless because other knowledgeable and intelligent people logically support contrary opinions. Most of the items presented in the advertisement as facts are not the truth; they are just true to some people who believe them. The NYT is a true believer.

True believers can be blinded from the truth and truly believe their false facts (opinions) are true. They do not hesitate to call alternative facts fake news, as is evident from the advertisement.

As true believers, the NYT editors are not interested in finding the truth. They are interested in banishing nonbelievers, suppressing facts that serve false gods, and proselytizing others with factoids that support their faith.

Mark Twain explained the NYT’s problem when he said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” In this case, the NYT “knows” its beliefs are the truth when really they are opinions.

Let’s return a moment to David Ruben’s comment: “the idea [of running the ad] is to be a part of that discussion about what does it mean to find the truth.” This statement reveals that in addition to the paper’s reporting failures, its leadership suffers from irrationality as well. There was nothing in the advertisement that even touched on “what it means to find the truth.” Instead, it only offered a list of items the NYT believes Trump opposes. It was pure political commentary and had nothing to do with finding the truth, much less what finding the truth means.

The advertisement ended with the idea that “the truth is more important now than ever.” This may have been one of the rare occasions when a NYT statement was both true and sufficiently comprehensive to be the full, rational truth. If so, it is important that everyone look for truth someplace other than the NYT. The truth is obviously just too hard for them.

[6/29/2017 Update: What is Fake News?  (Maybe Andrew Klavin read my post.)

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*  In this regard Obama was like all other presidents.

UPDATES:
** See “WikiLeaks Drops Proof That NYTimes Colluded With Hillary Clinton.”

Some of the wisest and most beautiful words ever put to parchment are these:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.” (Declaration of Independence)

Not far behind are these words:

“No one shall be deprived of life, liberty, or property without due process of law.” (Fourteenth Amendment)

At its core, the Declaration of Independence was a statement rejecting the king of England’s governance of the American people and explaining the reasons for that rejection. The concept “all men are created equal” holds that government should treat each person equally and that everyone is entitled to equal protection and rights under the law. (This concept was also embodied by rights outlined in the U.S. Constitution and its amendments.) Of course, it took years of infighting and a civil war to end some of the worst violations of these rights. Still, the Declaration of Independence and the Constitution planted the seeds that would eventually lead this country to recognize these rights more fully than any other nation ever. They propelled it to become the richest and most powerful nation ever.

It’s important to note that the rights and privileges protected by the Constitution offer no guarantee that anyone will achieve wealth or happiness. Apart from individuals’ inalienable rights, they have varying endowments that affect the extent to which they obtain life, liberty, and happiness. Governments are particularly unsuited to change citizens’ aptitudes, attitudes, desires, determination, perseverance, and trustworthiness, all of which are useful qualities for acquiring property and happiness. Consequently, a constitution could not—and the U.S. Constitution does not—try to equalize outcomes. Instead, it aims to ensure a fair game for citizens, and it’s up to society and individual players to determine what constitutes winning and who wins.

Some governments are founded to ensure the “right to an adequate standard of living” for everyone, or to pursue other lofty, results-oriented goals. Leftists in general, and especially Franklin D. Roosevelt (who espoused the “right to an adequate standard of living” as a worthy role for government), have tried to change the American government to reflect these ideals. Specifically, they have advocated for the government to ensure equal outcomes rather than equal rights. Propaganda supporting these ideas often asserts that income inequality is bad. (The reason most politicians advance this theory will be the subject of future blogs, though a hint is in this endnote.) To a large degree, however, ensuring equal outcomes is antithetical to ensuring equal rights.

“Collectivism” is a general name for the theory that the government’s role is to ensure equal outcomes. In theory, everyone contributes to the wealth of a group, such as a family, tribe, state, or nation, and all the group’s wealth belongs equally to everyone in it. Of course, the extent to which collectivism is implemented varies across governments. Results also vary among collectivist groups. Things which vary little, all other things being equal, are: 1) governments designed to enforce equal rights achieve better results for their citizens than governments designed to enforce equal outcomes, and 2) government officials of collectivist governments fare far better than those they govern.

The founders looked to history to assess whether collectivism would be an effective form of governance for the United States. For example, they evaluated the history of one of the first European colonies in America, Plymouth Colony. The colony was started in 1620 with a collectivist form of governance. While Karl Marx coined the phrase, “From each according to his abilities, to each according to his needs,” centuries later, that was the general idea the religious people who founded the colony believed would be the best way to do things. As such, everyone was entitled to take an equal share of the commonwealth produced by all the people in the colony. The colony owned the land, and the colonists worked the land. As is always the case, some people worked harder to add to the community’s common wealth than others, while others did next to nothing, or nothing at all. As is typical, less and less was added to the commonwealth as the productive people realized that they were exploited suckers. Competition to be the most exploited and most suckered has never been a game that people are motivated to play to the fullest. Before long, their governor, William Bradford, saw the colony failing, and decided to grant property rights to individuals and to allow the colonists to own what they produced. And they lived happily ever after (or at least as happy as humans could be in those days).

After considering past government structures and the recently minted theories of the Enlightenment, the founders rejected a government that would have enforced equal outcomes in favor of one that enforced equal rights.

Though collectivist ideals fly in the face of our founding principles, they are not wrong solely for this reason. If leftist (or progressive, “Liberal,” and socialist**) ideals would make the world or country a better place, they should be adopted. But do collectivist ideals make for better governance than the ideals set forth by America’s founders?

The history of collectivist societies is long, and the many attempts to make them work have varied. In general, however, when countries have tried to equalize standards of living, the majority of their citizens have become poorer, they have contributed less to innovation and development that benefits everyone, but their governors have fared far better than the governed (up to the point the economy and government collapses – which they inevitably do – at which point the heads of leaders generally roll). Collectivist countries have repeatedly failed the test of history, and it may even be impossible to disprove the saying, “Socialism fails every time it’s tried.” As deftly described by Hayek in The Road To Serfdom, collectivist societies also typically lead to tyranny. Recent examples of this truth are Venezuela, China, the U.S.S.R, Cuba, Greece, and Sweden (yes, Sweden!), among others. (Sweden, however, is also a heartening example that a country on the road to serfdom need not stay on that road. Such examples, however, are rare. Why it is so hard to get off that road is illustrated daily in news of the objections, marches, and riots which accompany efforts to take a less collectivist path in the U.S.)

Leftists in America have tried and have largely succeeded in tilting the playing field to benefit certain groups over others. As a consequence, the government’s role has shifted from what it was founded to be. That intended role was similar to that of a league organizer/rulemaker, whose goal was to ensure equal rights and who provided unbiased referees to oversee the game. The government has now become a combination league organizer/rule-maker, player, and referee provider, whose bias is to produce equal outcomes. (Everyone gets a trophy, too.) To enable this new role, the public has had to cede power to the government, which was denied in the founding documents. The founding documents, approved by We the People, did not grant the federal government the power to take wealth from some people and give it to the needy. Granting such power to the federal government inevitably leads to the need to cede even more power to the government.

No form of government can deliver universal happiness to the governed. As discussed in my blog on wealth, no matter the form of government, or the absolute standard of living of the poor, the poor will be among us, i.e., no government can eliminate poverty, no matter how hard a war on poverty is fought. Collectivist governments, however, promise to deliver on that impossible dream. People who do not know better are fine with the government taking a little fat away from the rich to provide lean to the poor. Following every additional grant of power to the government, needed to slice an additional layer from the rich, the presence of the poor persists. The power needed to redistribute wealth increases as the government slices into the rich’s wealth. All the while, the motivation to produce wealth declines as the rich gradually feel the effects of being society’s exploited suckers. (Those motivational effects are present whether or not a taxed person realizes such effects.) To satisfy the poor’s ever-growing desire for more, the government must cut even deeper. Consequently, no matter how much wealth is redistributed from the rich to the poor, the poor do not go away until everyone is equally poor. Hence, the book’s title is The Road to Serfdom.

As if the presence of tyrannical rulers were not bad enough, governments whose goal is to achieve equal outcomes have devastating impacts on the people they purport to help. Of course, providing food to people who are starving helps them in the short term. But humans have not figured out a way to have the government provide immediate relief to people without simultaneously trapping many of them in situations with terrible schools, broken families, danger, disgruntlement, hopelessness, drugs, and self-destructive attitudes. I recognize that I may be wrong and that the following ideas do not apply to everyone on welfare, but I think that able-bodied, sane people*** have a deep-seated understanding that they should “do their part.” Everyone understands the clear logic of “I’ll bring home the game, and you will cook it.” Everyone also understands it is wrong for a 19-year-old to sit around the house all day playing video games while other members of the household earn the money to pay the bills, go to the grocery store, prepare meals, etc. Worse, the inner voice of the able-bodied, sane person who does not do her part to provide for herself tells her she needs to either get to work or find an excuse for her freeloading – lest she live a life of guilt for not being a decent human being. This human trait is a major driver of the adoption of self-destructive attitudes and beliefs.

To salve their conscience, people who are given things they have not earned glom onto all kinds of theories to justify (at least in their own minds) why it is okay that other people must work to support and feed them. In short, since it is okay to receive from others that which you deserve, it becomes the job of welfare recipients to dream up theories or accept the theories of others as to why they deserve money from the government.

For example, a welfare recipient might view herself as entitled to welfare because her ancestors were treated terribly. (The underlying theory is something like: Justice is served if descendants of evildoers pay the price for what their ancestors did.) A variation on that theme would be a welfare recipient who views herself as merely collecting a debt owed to her ancestors, i.e., the debt accrued because the labor of her ancestors was exploited by the ancestors of today’s taxpayers. (A typically unattended detail of this theory is how a tax system could be designed to exclude taxation of current taxpayers whose ancestors came to America after slavery was abolished, and tax only that portion of a taxpayer’s heritage that came from slaveholders.)

A popular theory is that because other people are luckier than I am, the lucky ones should share their luck with me. I have never seen a logical argument for how this theory carries any water, but it is clear that the general principle makes no sense and is not a justification for first-world welfare recipients to draw on the supposed pool of universal luck. For example, by the luck of having been born in the U.S., most U.S. welfare recipients are wealthier than the average human on planet Earth. So, if luck is something that should be shared equally by all, U.S. welfare recipients would have to pay into the pool of universal luck in order to equalize luck. Neither does it properly account for the fact that people often make their own luck. It would be a tremendous stroke of luck for a computer programmer if a cushy, high-paying computer programming job opened up in my town. It would not be lucky for me because I did not study and train to be eligible to take advantage of that luck. Exactly what would the person who landed that job owe me because of her luck in getting that job? What would I owe her for my luck in getting the job I have?

Another popular theory goes something like this: “If the government can spend $X billion on X, e.g., fighting unnecessary wars, then it can afford to give money to Y people, e.g., welfare recipients.” The logic as to why spending money on one thing justifies spending money on another escapes me – spending money on one bad thing has no bearing on whether spending on another thing is good. More importantly, the fact that the government has spent $X billion on (you name it) necessarily means it has $X billion less to spend on other things, i.e., it is less able to afford them.

A favorite, go-to theory to justify freeloading is that the people who provide the manna are demons, i.e., they deserve to be punished for their evil ways. That is why it is not sufficient to just soak the rich. On the contrary, CEOs, trust fund babies, everyone on or in Wall Street, Big Oil, Walmart, or simply “The Rich” must be demonized to boot. Otherwise, the soaking cannot be justified. Given the importance of justifying the taking, any ol’ presumption of evil will do, e.g., see my blog post on Greed. The rationales for why the revenue from the extra taxes should go to the poor rather than to other objectives (e.g., education or the environment) are usually weak or nonexistent (this is not to suggest they are not plentiful).

While there is some logic in some of the theories used to justify “you work, I eat,” they do not justify people who could add to the community’s wealth (if only to work for their own sustenance) but choose to let others do the work for them. Embracing these theories leads to greater disgruntlement, not greater happiness. Counting one’s misgivings is self-destructive. Subcultures that adopt these theories tend to eschew life-enriching habits such as applying oneself to becoming educated. Rather than encourage the uplifting pursuit of education, these subcultures instill the belief that pursuing education is selling out the subculture by putting a lie to the theories upon which they rely to freeload. In short, the pursuit of equal outcomes is not a recipe for human flourishing. On the contrary, the pursuit of equal outcomes is a recipe for ever greater unhealthy grievances. To the extent that redistributing income rewards envy, such redistribution increases evil in the process.

Government programs intended to help the poor also hurt the poor. The Great Society programs of the 1960s are a good case in point. Before those initiatives to help black people, the percentage of two-parent households was higher among black parents than among white parents, and black Americans were making greater strides up the ladder of success than they are now. The Great Society initiatives stopped that progress for more than ten years**** and rapidly began tearing families apart, which had a disparate impact on black families because a higher percentage of black people were recipients of this “help” than were other people. According to this report, non-Hispanic white single-parent households made up 25 percent of all families with children under 18 in 2015, while 66 percent of single-parent households with children under the age of 18 were made up of black individuals. The Great Society programs’ devastation of so many black families is both heartbreaking and hurtful to the people the programs were intended to help.

People often claim that the government is simply not giving enough to the poor. This may be true, but I’ve never seen evidence that more government handouts can feed empty stomachs without also feeding grievances. Moreover, more money is not always the right answer. It makes no difference how much money is pumped into schools in disadvantaged neighborhoods if doing so increases the need to foster the sentiment that applying oneself is a betrayal of one’s subculture. In short, to a large degree, pouring more money into the flawed welfare system makes matters worse for society and its participants.

Finally, consider what affirmative action has done to the credentials of its recipients. America is blessed with colleges that are suitable for the most intelligent and prepared students in the world, colleges suitable for the least intelligent and prepared students, and colleges for everyone in between. As Malcolm Gladwell so astutely observed in David and Goliath, students who are fully capable of excelling in a school appropriate for their gifts and preparation could live a happy and productive life in the discipline about which they are passionate, but they will flunk out or give up on their passion if they go to a college where they are outmatched. The highest cost of affirmative action is that it propels disadvantaged students into colleges where their peers are better prepared and suited for the coursework. As a result, disadvantaged students are often disheartened and drop out to pursue less challenging disciplines, i.e., those about which they are less passionate. Additionally, employers are often more skeptical of the credentials of individuals promoted through affirmative action, as they assume professors were more lenient in grading minority students. This fact is certainly unfair to the students (of which there are many) who earned their credentials, but there is no way for an employer to determine with confidence which applicants deserved their grades or promotions on the basis of scholastic merit or skin hue. No law can undo this unavoidable downside of affirmative action.

I could present many more examples of ways redistribution does more harm than good. Hopefully, however, this blog has already led you to reconsider any beliefs that go against the ideals established by the Declaration of Independence and the Constitution.

Additionally, income inequality is not just a bug of the system; it is also an essential feature of it. But that is the subject of a future blog.

VIDEO RESOURCES

Free Or Equal

Free To Choose

The War On Work

ADDITIONAL RESOURCES:

The Progress of American Blacks

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iThe politicians elected in such collectivist societies are those who are most skilled at convincing poorer factions of the electorate (and voters who are sympathetic to their plight) that they will take from and control the rich for the benefit of that particular faction. All the while, most of those politicians are primarily serving themselves and doing favors for the people who can help them the most. The favors sought by those who pay politicians (e.g., by contributing to their campaign fund) usually implement policies that will hurt the people who elected the favor-selling politicians.

**When it comes to issues that have direct economic effects, “liberal” ideals are almost the opposite of the liberal ideals of the Enlightenment, i.e., the ideals that propelled the modern world.

***This discussion of “able-bodied, sane people” obviously does not apply to people who do not fit this description. Everyone, able and disabled alike, understands that people who are physically or mentally incapacitated are exempt from doing what is expected of a decent person who is not incapacitated.

**** “The poverty rate among black families fell from 87 percent in 1940 to 47 percent in 1960, during an era of virtually no major civil rights legislation or anti-poverty programs. It dropped another 17 percentage points during the decade of the 1960s and one percentage point during the 1970s. . .” Thomas Sowell.

Dictionary.com says greed is “excessive or rapacious desire, especially for wealth or possessions.” Gordon Gekko says, “greed is good.” Many other people say greed is bad. For example, commenters on Facebook and elsewhere often say greed is why companies do not pay their employees more. They also blame greed for many of the country’s societal and economic ills. Sometimes they are right, but usually, they are wrong. Let’s sort this out.

First, let’s observe that people are sloppy in using the word “greed” by focusing on greed as the “excessive” desire for wealth or possessions. (I’m willing to stipulate that “rapacious” desires for wealth or possessions are unalloyed evil.) As discussed in my blog post, “Wealth,” a person poor enough to be in the world’s bottom billion would likely perceive a person on welfare in the United States to be greedy if the welfare recipient desired more wealth or possessions. The same would likely be true of an American on welfare, considering whether a billionaire who desires more money evinces an “excessive” desire for wealth or possessions, whereas a trillionaire could believe that millionaires have an insufficient desire to produce things that their fellow man needs or desires. In short, rather than being an objective statement of fact about someone, “greed” is usually merely an epithet to malign someone the user of the word does not like.

Also, it’s unlikely that greed has ever been the sole motivation for anyone to create and pursue wealth. Even if someone was solely motivated by greed, how could anyone but the person in question know the person’s motivation(s)? Outward appearances would be the same whether the motivation was greed or something else, such as the desire for fame or the interest in inventing, developing, and selling something valued by or useful to her fellow man. Motivation could also come from the desire to discover, create, work, or lead, make jobs available for people in need, or build a nest egg for family security or charity. People can become wealthy by becoming beloved by billions of consumers (think Steve Jobs) or by winning a lottery. Still, there is rarely justification for assuming greed was the sole or any part of the motivation.

Despite this, many people believe greed is the cause of much human suffering. Surely that is so to some extent. However, the desire for more (e.g., income, wealth, the things those things make possible for people) is the primary motivation that has driven humans to invent, develop, manufacture, and deliver all the wonderful, non-natural, beneficial things now available. Typically, the more people desire income, wealth, etc., the more likely they are to create things that relieve human suffering or produce happiness. Consequently, excessive desire for income, wealth, etc., will usually result in a greater reduction in suffering and an abundance of happiness.  The belief that greed is a major source of human suffering is based on little or no evidence and typically ignores the cornucopia of goods and services that humans desire.

Of course, excessive desire for wealth or possessions is very bad. (It’s a sin, for God’s sake!) Excessive desire too often causes people to commit crimes and other sins. Wanting more money out of vanity is not a good look. I also think, however, that people falsely assume that 1)  greed causes already-wealthy people to seek more money, and 2) people having great wealth is the reason other people are in need of food, clothing, and shelter. From these assumptions, people conclude that greed must be keeping wealthy people from sharing more with the poor, but they are wrong to jump to this conclusion.

Do you consider middle-income Americans wealthy? In a very real and relevant sense, they are. According to Wikipedia, John D. Rockefeller is the richest person in modern history. Rockefeller lived the first 74 years of his 98 years before 1914, the year the first air conditioner was installed in a home. If he ever flew in a plane, it was very late in life; he did not go far, and the plane was relatively uncomfortable, dangerous, and unreliable. He never took his kids or grandkids to anything like Disneyland, much less Disney World. His doctor and dentist had a tiny fraction of the knowledge, tools, procedures, pain relievers, and drugs available to middle-income people today. And he had fewer entertainment options, as opportunities weren’t nearly as plentiful or as good back then. Was Rockefeller rich? You bet! Could he enjoy a lifestyle as good as that of a middle-income American today? In most respects, no. My guess is that very few, if any, middle-income Americans today would willingly switch places with the richest man in modern history.^[i]

Despite being super-rich by historical standards, many middle-income people consider themselves to be relatively poor. This is mostly because they see people vastly richer than themselves, which blinds them to their absolute wealth, e.g., they are rich compared to 99% of all humans who have ever lived. Yes, all Americans are in the top 1% by this standard.) Today, people on welfare, with middle incomes, and with executive salaries perceive themselves as poor relative to others they see regularly and on TV or the internet. They feel poor because feeling rich is not a function of absolute wealth. People with less wealth than Elon Musk or Bill Gates will constantly see others with more income and wealth than themselves. It is normal to feel poor by comparison, no matter where one falls on the income distribution curve. However, it’s important to realize that the 540^th richest person in the U.S. sees the other 539 wealthier people as having many multiples of her wealth (rightfully so). That person cannot be happy that her foundation cannot do nearly as much good work as the Gates Foundation, because billionaire number 540 is a pauper by comparison.

The upshot is that no individuals on the income curve consider themselves greedy because they, like you, want more than what they already have. There is no inherent correlation between absolute levels of wealth and greediness, so it is just as unfair for a poor American to call a wealthier American greedy as it is for a poor Pakistani to call a poor American greedy for wanting more. Some poor and rich Americans may be greedy, but their income levels have nothing to do with it.

The poorest U.S. billionaire, or the 540^th person who wants to move up to the 539th spot, is not necessarily greedier than the middle manager who wants to be an executive manager or the mail clerk who wants to be a middle manager. For many and sundry reasons, some people are greedier than others, irrespective of their income or status.

Having set the stage, let’s get back to a discussion of greed itself. Pretend you are a middle-income person in America. You post an ad to sell your car, worth $10,000. A person much poorer than you comes to your door and says she wants to buy the car but can only afford to pay $3,000. Are you greedy if you say, “Thanks, but no thanks?” What if she then gives you a heart-wrenching and believable story about how financially desperate she and her family are and how, with your car, she could start an Uber business to make ends meet? If you turn down her offer again, wouldn’t it be fair to consider you even greedier because you’ve heard her tale of woe?

The answer to the above questions is “no.” You are not greedy or greedier based on the above facts alone. (You may actually be greedy for some other reason, but turning down the offer is not evidence of greed.) The existence of financially desperate people is a real and important societal problem, especially for those who have been unfairly disadvantaged or have suffered bad luck. Each of us has societal obligations to do our part in addressing those problems, such as paying a fair share of taxes. Choosing to help the people who happen to knock on your door would be kind and good, but with few exceptions, you are not morally obligated to help everyone in need who stands before you. One reason for this is that it would be an astounding coincidence if the need of the person standing before you happens to be the most worthy candidate for the money you could spare for charity. Chances are, you would accomplish less total good by giving money to the person knocking on your door than to someone else, e.g., someone in greater need.

Let’s take this to the next level. Say you own a janitorial service company. Your company makes enough profit for you to draw a salary of about $52,000 per year (the U.S. median income in 2016). The company’s janitorial jobs require relatively low skills, and although you only pay janitors the minimum wage, you routinely have three or more applicants for every job opening you have. What if an applicant for a janitorial job tells you a tragic story about why she needs a job and a wage of $2 per hour more than the minimum wage?

You would realize that the extra money would come out of your own pocket. If only one employee received an extra $2 per hour, that might not be too bad. But if word got out that someone was getting a higher wage (and it is hard to keep this kind of secret), you would have to deal with a bunch of angry employees demanding the same raise. Giving more employees higher pay could put you out of business. Think about all the factors in this situation: 1) the local property, school, state, and federal income tax you pay, 2) the jobs you have created and how bad it would be for your employees if those jobs went away, 3) the charitable contributions you would not be able to make if the business went down, 4) the legality of paying minimum wage, and 5) your employees’ ability to improve their skills and establish a good work record and earning the good feeling of not being dependent on welfare.  You might conclude that you are doing more than many other people to address societal problems. You might also say to yourself, “I had nothing to do with the applicant not having the skills to justify the wage she desires.” Could anyone fairly call you greedy if you decided to hire the next person in line? I, for one, cannot see how paying the minimum wage or hiring the next person in line could fairly be described as an “excessive. . . desire . . . for wealth or possessions.” Yet the woeful applicant might well assume that the janitorial service owner is greedy.

The larger the company, the greater the number of dollars and people involved in employee compensation decisions. Usually, a smaller percentage of the company’s employees earn minimum wage, but everyone in the company wants to be paid more. In short, the same dynamics and issues confronting the janitorial service company are also at play in all companies. The factors considered when it comes to employee pay in all companies rarely have anything to do with greed.

The Golden State Warriors basketball team pays its star player, Kevin Durant, $65 million a year. Do you think the team owners would not prefer to pay him $64 million or $32 million (or minimum wage)? Do you think the McDonald’s franchise owners want to pay their store managers more than the minimum wage? Do you think the board of directors of any company (which usually owns stock in the company) wants to pay the CEO a penny more than it must to hire and keep him or her?  If you do, please think again. It is not an overstatement to say that all employers pay their employees more than they would prefer.

Obviously, owners would make more money if they paid their employees less. This is true of both greedy and non-greedy employers. The reason employers do not pay less is that, in a free market, employers cannot pay much less than the value produced by an employee’s labor. If an employer were to attempt to pay much less than that amount, the employee would likely find another employer willing to pay the value of his labor—i.e., the employee on whom the employer makes too much money will soon be working at another company. This is because an underpaid employee in one company is an opportunity for another company to profit. If an employer pays its employees more than their labor is worth, the company must charge more for its products to earn enough profit to stay in business. So, if companies pay employees substantially more than the value of their labor, their prices will be higher than their competitors’ prices for the same products. (We all know how that story would end.)

When the Warriors hired Durant, the owners must have believed his value to the team was worth more than his pay (otherwise, they wouldn’t have offered that much). If Durant was worth $66 million a year to the team, but the owners believed no other team would pay him more than $64.9 million, it would have made sense for the owners to offer him $65 million. (That owner’s desire to make a profit on a $65 million investment should not be a surprise or something to be alarmed about. If owners do not expect to make money on their investment, they will not make the investment.) If Durant believed $65 million a year was the best offer he could get, he would agree to be “exploited” to the tune of $1 million per year (his other choice being to accept a $64.9 million offer from another team). Note that this describes a voluntary transaction in which both parties believe they will be better off after the deal — a win-win situation.

Was Durant being greedy? The team sells tickets, TV concessions, and everything else it can at prices that maximize profit. Both the team owners and Durant must believe the team’s revenue would be higher if Durant were on the team. The team revenue (what customers would pay) would be the same whether Durant was paid $1 or $65 million. How could Durant be greedy for wanting a large cut of the extra value he would bring rather than letting the team owners keep all the money he would bring to the team?

The main point is this: If one team does not offer Durant a salary commensurate with the value he would bring to the team, another team will. The same is true for franchise managers and every other job in the company. It should be obvious that an employer’s greed is irrelevant to how much it pays its employees.

People often say employers exploit their employees by paying them too little. As noted above, employers do try to profit off of every employee because the whole point of a business is to make a profit, and a business that does not make a profit will not be in business for long. Also, as mentioned above, an unreasonably high profit on an employee creates a profit opportunity for other companies, i.e., other employers can hire that employee at a higher wage and make a reasonable profit on that employee. In this sense, in my example above, Durant was “exploited” by $1 million per year.

Many of you may think that using the word “exploit,” as I did above, is crazy. Perhaps it is, but people often talk about employers exploiting employees. The only employee exploitation that can exist is the kind I described, and it is small (less than 2% of a salary in the Durant example). Paying people the market value of their labor should not be called exploitation. In a free and robust market, no other kind of employee exploitation can survive the incessant competition for valuable employees. (There are some exceptions, such as in tiny towns with few businesses, but the hue and cry about employee exploitation usually relates to large companies, such as Walmart, McDonald’s, and the like, which are mostly in highly populated areas.)

To many, exploitation is afoot anytime an employee is not paid “a living wage” or some other amount they consider to be fair. These people do not consider that the wage they prefer for others may be far above the value of the employee’s labor. Ignoring labor’s value when discussing the price of labor is preposterous. If the value of an employee’s work is $0 (e.g., the employee digs holes and then buries them), then the entire amount paid to the employee is a gift from the employer. On the other hand, any law that forces employers to pay more for labor than it is worth is an act of exploitation.

A desire to force employers who have done something wrong to pay for their wrongdoing is good. A desire to force all employers of low-skilled workers to pay higher minimum wages is ethically wrong, but that is not the worst effect. It is also wrong to punish people on the presumption that they did something wrong. A desire for low-skilled workers to have a better life is good. A desire for laws that exploit people (e.g., employers of low-skilled workers) could fairly be called an “excessive desire,” a.k.a. “greedy.”

Someone who is disproportionately suffering from societal ills may deserve to receive more money than the value of what she can produce. In such a case, it may be society’s responsibility to fund appropriate supplemental payments, but responsibility for funding those payments should certainly not be placed on employers of low-skilled workers as a punishment for imagined greed. Employers have provided employees with a source of income and job training that may not have been available otherwise. Exploiting employers of low-skilled workers by forcing them to pay to redress problems caused by society — a problem that employers address to some extent when they employ someone — is fundamentally unfair. To label an employer as “greedy” for not wanting to be singled out and exploited in this fashion is akin to something out of the pages of Alice in Wonderland.

So, while there is some truth in Gordon Gekko’s take on greed, what he missed is more important than what he said.

Updated 1/20/2024

I recently engaged in a Facebook conversation about a cartoon with the caption “So you understand how the consumer will end up paying for a tariff, but fail to realize how the consumer pays for a minimum wage increase?” Though the question posed by the cartoon was great, people did not talk much about it in the comments. Rather, the conversation gravitated to how great it would be if CEO wages were capped at no more than five times a company’s lowest paid employee’s wages and to why the U.S. should implement a Universal Basic Income (UBI) plan in response to the effects of automation and artificial intelligence on jobs. There were some decent conversations, but then came this comment:

“. . . a lot of money is made via capital gains, which requires no actual labor and is basically the same as UBI. Except only rich people get it because it requires having money in the first place.”

UBI is a plan for the government to replace all welfare programs with a direct payment of unrestricted cash to certain people. There is little consensus on who would receive UBI (Michael Munger, a respected economist, proposes UBI go to every American), how it would work, and whether it is a good idea. (People who think they know how to run other people’s lives hate the idea of UBI.)

I was stunned that so much misunderstanding could be crammed into such a short statement (and that so much miseducation could be revealed in one sentence). There is approximately zero similarity between UBI and capital gains.

Sorting out misunderstandings about capital gains is important because if too many voters believe capital gains are free money that goes to rich slackers, then voters will support policies that reduce the number of new jobs created—jobs that will be needed as machines replace workers at an accelerating pace.

Let’s be clear on what capital gains are. Capital gains happen when someone sells a capital asset at a price higher than what he or she paid for it. Capital assets are investment properties, stocks and bonds, and similar things. Capital gains taxes are imposed on such gains. Properties that are intended to be sold in the regular course of a business’s operation are not capital assets. If a non-capital asset is sold for more than it costs, the resulting gain is called ordinary income and is taxed as such.

A typical capital gain happens when a person scrapes together savings, mortgages his or her house, and gets a loan to start a business. The person works hard over many years to make the business successful for family members, employees, and customers. The person draws just enough salary to “put food on the table” because drawing more would reduce the business’s chance of success. If the business fails, the mortgage company will take the house, and the person will have a damaged reputation, a disappointed family, and no savings. If after many years of hard work, risk, and struggle, a company comes along and buys the business for more than the person invested in it, he or she will make a capital gain and pay capital gains taxes on it. (Hopefully none of this sounds anything like UBI.)

Investments are good for everyone because they enable companies to get started and grow. If there are more investments, there are more companies, and if there are bigger companies, there are more jobs and more taxes paid (though more jobs lessen the need for taxes). Fewer investments mean fewer attempts to start businesses, which leads to fewer successful businesses. Successful businesses create wealth that can be used to launch even more businesses, to generate more tax revenue (adding to the government can afford), and to create more jobs for people who might otherwise be on welfare (welfare payments subtract from what government can afford). Therefore, creating more businesses is a winning strategy.

There is another important “win” from people investing money in businesses rather than spending it on bigger and better yachts or other items. An essential feature of investments is enabling people to be more productive. If workers are more productive, they are more likely to be competitive in the workforce and to have good and secure jobs with higher wages and to be more successful in competing with everyone else in the world. Investments in both education and innovative tools and methods enable people to be more productive and competitive. An investment in education is in human capital, and an investment in innovation is in physical capital, which leverages human capital. U.S. employees are paid more than people in other countries largely because Americans are more productive and have better tools that can only be obtained through investment.

As great as those things are, many people would value another aspect of investment-enabled job creation more than the combination of all the above if they were aware of it. To see this beneficial aspect, one must first understand why people are paid what they are paid. For people who make more than the minimum wage, their salaries are dictated by supply and demand. As a general rule, the longer the queue of qualified people competing for a particular job (the greater the supply of workers), the lower the wages will be for the job. The shorter the queue, the higher the wages. This explains why highly skilled teachers often earn less than other workers whose jobs require fewer and less challenging skills. The queues for teachers’ jobs are long because of the many non-monetary rewards obtained through teaching. The queues are short for many other jobs because there are fewer or no rewards other than pay.*

As newly created good jobs are filled, there are fewer people looking for those jobs, and the supply of workers relative to the number of job openings falls. As the supply of workers looking for jobs shrinks, the amount paid to workers will go up. Think of how wages for middle and low income people have stagnated over the last nine years. Much of this stems from slow job growth and too many applicants for too few jobs. More investments would have addressed this problem.

If we want to continue to enjoy the benefits of an economy that enables quality jobs to exist and grow in number, we must facilitate heavy investment in our people, tools, and methods. If we reduce expected gains from investments (by taxing more or otherwise), there will be less investment, poorer results, fewer jobs, a diminished ability to compete with other countries, and continued stagnating wages.

The big picture is that people have accumulated wealth because they have sold something to people who valued that product more than they valued the money that bought it, i.e., the buyers gained from the purchases. And the seller gained too. Since such exchanges are voluntarily, they would not have happened if the results were not mutually advantageous. Both parties to the transaction may have wished it was more advantageous, but if wishes were horses, beggars would ride.

People mostly have three choices when it comes to surplus wealth: put it under a mattress, lend it, or invest it. Money under a mattress does no good. Loans pose a relatively small risk, but they result in a relatively low income compared to possible gains from equity investments. Loans are also less rewarding because their interest is taxed as ordinary income, but they still enable people to grow their companies and create jobs.

Businesses cannot borrow much without sufficient collateral. Collateral comes from equity, and equity comes from investments in companies. Without investment there would not be companies. People who invest in companies bear the substantial risk of losing some or all of their investments. Unlike UBI, the gain from investing money is not a free ride.

These facts reveal the biggest difference between UBI and investments. To receive UBI you are not required to have done anything (e.g., availed yourself of education or work opportunities), and UBI recipients never need to take financial or reputational risks. With a few exceptions, one must have first worked hard and provided a great deal of value to other humans to accumulate investment capital. More important, one must risk losing capital to make money from investments. The more one invests, the more one has at risk. Stock market and individual company crashes have caused many a millionaire to go bankrupt. By comparison, a worker suffers the relatively minor inconvenience of having to find another job, and a UBI couch potato need not trouble himself at all.

To cap it off, capital gains are taxed, and UBI would not be taxed.

UBI may be part of America’s future. It cannot, however, be justified with the theory that the rich get free money.

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*This is also why talented CEOs and other top executives get paid so much. Rarely are there queues for these people. Top executives already have top jobs with great pay, benefits, and perquisites. To lure them away from their current jobs and uproot their families to solve company problems will cost a great deal. If they are good as expected, they will make a company much more than they cost. When top executives can make yacht loads of wealth for a company (which, of course, is what is left over after the CEOs are paid), they are worth their salaries.

This is the second of a two-part response to a friend’s reply on Facebook about my Wealth blog post. Each of the two questions is so good that I’ll address each in a separate blog. Here is the Facebook comment:

I agree with much of the sentiment [expressed in the Wealth blog post]. Let us apply some devil’s advocate to it anyways. If wealth does not necessarily create happiness, why endorse it so strongly? I mean, you say it increases standards of living, which is definitely true. But if people on average are not any happier despite a higher standard of living, then it seems to be a debatable good. Create enough wealth and the people become fat and lazy, which is why historically, every civilization that has risen has eventually fallen as well.

Question 2: [My paraphrase.] Given that wealth causes people to become fat and lazy, and nations of fat and lazy people fail, why want wealth creation?

Yes, on account of Rome’s growing wealth Romans eventually got fat and lazy and abandoned the beliefs and virtues which enabled Rome to become wealthy. In so doing they became weak and got overthrown by the Goths, Visigoths and the like. Other powers have suffered similar fates for similar reasons. It very much appears the US is following a similar path. It just might be an unavoidable human thing.

We do not know how long it will take for us to get fat and lazy enough to plunge the world into another dark age. Despite the fact that humans tend not to appreciate how good they have it, life with what wealth makes available to people is better than life without those things. Humans wanting a better life for their progeny and their fellow man (whether or not they will appreciate it) is a very human, and very worthy sentiment. It may be a very long time before we slide into the next dark age. However long between now and then, it will be better for our children and grandchildren to have lives with more abundance and knowledge than would be the case absent robust wealth creation.

On the other hand, it is possible that enough people discover the lessons of the failures of the fat and lazy lost empires and avoid their fate. More wealth will facilitate more research into how to avoid those fates and the implementation of solutions.

Moreover, we are better off because of what the thinkers and doers of Rome and other eventually failed empires did. The US founders would have formed a much less perfect union had they not learned much from the thinkers and political experiments of other empires – especially the Greek and Roman. Even if we fail to turn back from the things that are leading us to another dark age, we having tested higher limits of wealth creation will be quite useful to the societies which flower after the next dark age.

This is the first of a two-part response to a friend’s Facebook comment on my “Wealth” blog. The questions raised by my friend are so interesting that I’ll address each in a separate blog. Here is the Facebook comment:

I agree with much of the sentiment (expressed in the Wealth blog). Let us apply some devil’s advocate to it anyways. If wealth does not necessarily create happiness, why endorse it so strongly? I mean, you say it increases standards of living, which is definitely true. But if people on average are not any happier despite a higher standard of living, then it seems to be a debatable good. Create enough wealth, and the people become fat and lazy, which is why historically, every civilization that has risen has eventually fallen as well.

Question One (Paraphrased): If wealth creation does not make people happy, why is it important, or why do you make a big deal of it? I have many answers, but to avoid another book-length blog I’ll mention only a couple.

Happiness is the means, not the end.

Our republic has proven (to the extent anything in the social sciences can be proven) that a national government fares better if it is constitutionally prevented from infringing on any of its law-abiding citizens’ inalienable right to pursue happiness. Allowing individuals to pursue their own happiness in a state with a reasonable level of property rights and rule of law has proven to be remarkably conducive to improvements over time in both quality of life and human relations.

Compare the lives and attitudes of people in 1789 and 2017. In 1789 there was a ubiquitous presence of human and animal excrement that was lightly treated, if at all. Even the rich had to maneuver around the horse poop in the streets. There was also nearly universal child labor, fear of famine, a lack of effective pain killers and cures, sparse to no understanding of microbes and toxins in drinking water, high infant and maternal mortality, and short life expectancy. There was much more depravity, but you get the picture.

Many authors have chronicled the downsides of industrialization and its attendant wealth creation, and some make good points. I think, however, that human life and culture is enhanced by wealth and that the sooner wealth is created, the better.

On the human relations front, the percentage of the population that was racist, sexist, anti-gay, xenophobic, and religiously intolerant was much larger in 1789 than now. Nevertheless, people then like people today had some happy days and times. They probably rarely counted their blessings as to how much better off they were than the people who experienced the Black Death a few centuries earlier—just like people now rarely think about how much better things are today than they were in 1789. Humans in all times tend not to focus on the good things in life. Instead, they seek out and dwell on the things that make them unhappy.

It is not the government’s role to pursue the impossible, i.e., to make people happy. It is the government’s role to let citizens pursue their own happiness and to create an environment where people can reasonably hope things will get better. Hope is a big motivation for people to make things better, but it dwindles when things are stagnant. Hope and feelings of self-worth and contentment are fostered when people produce goods and services that are useful to and valued by their fellow humans. Idle hands give people extra time to count their misgivings and dwell on the negatives. Without hope, people not only flourish less, but they also dream up excuses about why they are not participating in good things like others in society, and this usually involves demonizing other people. Calling out people who are doing harm is fine, but demonizing people who are not doing harm or are doing is good is bad for everyone.

In general, the more rapidly wealth is created, the fewer people are forced into the unhappiness of idleness. If there is hope that better times are around the corner, more people will participate in the human enterprise of trying to make life better for others (something that every job does), and they will feel better about themselves. Will they be constantly happy? No. Will they be happy more often? Probably, but happiness is far less important than feeling that one is doing something positive for others. It is the pursuit of happiness, not obtaining it, that does the trick.

One would be hard-pressed to name a topic that stirs up as many intense feelings and beliefs and is as often misunderstood as wealth. Thus, sorting out the subject could be useful.

Webster’s Dictionary defines wealth as the “abundance of valuable material possessions or resources.”  The most common thing people believe about wealth is that they do not have enough of it. This suggests that most people believe wealth is good — at least for themselves. On the other hand, many individuals believe 1) that an abundance of wealth is bad in the hands of others, 2) that having an abundance of wealth is a sign of having done bad things, and/or 3) that most wealthy people do not deserve their wealth.

Before getting into the meat of the subject, let’s discuss something odd and confounding about wealth. Anyone who has valuable material possessions or resources at his disposal that are not needed for survival has some wealth. There are places on Earth where someone who has one-tenth the material resources of the average welfare recipients in the U.S. would be seen as having “an abundance of valuable material possessions or resources.” In this case, the welfare recipient would be considered by everyone around to be wealthy. Yet, people on welfare in the U.S. (with ten times as many resources at their disposal) would be considered the opposite of wealthy. Similarly, Americans would say a person who earns $200,000 a year is wealthy—and for good reason—but the lifestyles of people who make that much bear no resemblance to Bill Gates’s or any billionaire’s lifestyle. If a space alien were to land in Gates’s backyard and learn he is the richest person on the planet, the alien might keep to herself the thought, “Is this all you got?”

To navigate this topic despite the morass just described, I must simplify. When I use the term “the wealthy” in this blog, I am referring to people whose abundance of wealth is several standard deviations above the mean wherever they live.

Money can’t buy love or many other things. By no means is the amount of wealth one accumulates a reliable measure of the character or value of a person, and fulfilling and meritorious lives can be lived without accumulating wealth. It might also be true that a starving artist can produce valuable art a wealthy person cannot.

Creating wealth also has moral implications. A moral person will, if physically and mentally capable, produce more than he or she consumes. A moral family will produce more than the family consumes if physically and mentally capable. There are at least two parts to this moral obligation. First, not producing enough for oneself or one’s family imposes a burden on others to produce the things that a person or family consumes. (Choosing to be a burden is immoral.) Second, when one does not produce a surplus, he shirks a

responsibility to help provide for the physically or mentally disabled.

So, if able, anyone who consumes resources should create resources, i.e., people are obliged to create or facilitate the creation of wealth. People can do their part in wealth creation in many and varied ways. For example, stay-at-home parents not only create human capital when they raise healthy and capable children (and human capital is the ultimate resource), but they also facilitate the production of wealth by the parent working outside the home. The wealth I have created is in large part attributable to the tremendous job my wife did in this role on both counts.

Another moral aspect of wealth creation is that it very often, if not always, has positive and negative consequences. Even before carbon dioxide emissions were considered a negative externality, coal mining resulted in people living off the modern equivalent of $1 a day while wracked by untreatable pain, polluted skies, black lung disease, back-breaking and dangerous labor, and the depletion of natural resources. The Industrial Revolution, which was made possible by coal production, periodically relieved humanity from famines and plagues, massive infant mortality, and short life expectancy and enabled the modern technological wonders humans now enjoy.

Many people would add to the above list of externalities. For example, the use of coal fostered factory labor. Factory labor was dehumanizing, sometimes led to child labor, and caused many to leave their “idyllic” farm lives. Despite these negative results, people took factory jobs because they could live a better life than would have been possible with their alternatives. One should realize that having young children working on farms was necessary for survival prior to coal mining came about. At first, there was nothing unnatural about children working as they had always done. Child labor only became dispensable after the factory machines (made possible and available by capitalism) improved the productivity of ordinary workers so they could produce enough to provide for their families. Even then, there was not enough productivity to dispense with all child labor. The first child labor laws restricted the employment of children younger than nine years old, and the next wave of laws only required employers to provide a certain amount of education to young workers. Capitalism took more than 100 years to produce sufficient productivity per worker to raise the legal age of an adult to 18.

While I’m not a big fan of Thomas Hobbs, he got some things right. When speaking of the effects of war in Leviathan (1651), Hobbs wrote this:

“Whatsoever therefore is consequent to a time of war, where every man is enemy to every man, the same consequent to the time wherein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.”

Hobbs was describing the difference between states of war and states of peace. Note, however, how aptly this description applies to the difference between having economic prosperity and not having it. The economic well-being and connectedness of a common person today is far better than the economic well-being and connectedness experienced by the common person of the 17th century. It is so much better, in fact, that it would be fair to consider the lives of common people during good times in the 17th century as “solitary, poor, nasty, brutish, and short.”

With all its faults and narrowness of focus, the wealth brought about by capitalism has lessened human suffering, solved problems, allowed humans to flourish, and enabled billions of more people to partake in the joys of life.

Wealth cannot solve all human problems—not by a long shot. It would be hard, however, to find a cause or a pursuit of knowledge that would not benefit from more money behind it.

Having wealth does not necessarily lead to happiness. I’m not referring here to the rich person who is miserable because he is not as rich as someone else; that is a first-world problem of little importance. I’m referring to a more universal problem with wealth. It ties into Jesus’s observation that the poor will always be among us. The main reason this observation is still true in a much more prosperous world than the one in which Jesus walked is that once a society has achieved a certain standard of living for the average person, absolute wealth is relatively unimportant. When considering air conditioning, cell phones, access to advanced medicines, the absence of a fear of famine, high-quality news and entertainment available for a pittance, and willing and able wealthier people who want to help, etc., it appears that many poor people in wealthy nations today have a higher standard of living (they consume more and higher quality resources) than the richest people one hundred years ago. John Rockefeller, the founder of the Standard Oil Company (which almost single-handedly put an end to the whaling industry), may have had scores of servants whose work was equivalent to a massive amount of power. But having the ability to flip a switch to turn on the lights, heat, air conditioning, or an entertainment system wields far more power. Still, poor people are justifiably unhappy, and giving money to poor people to try and solve the problem usually makes the problem worse. (The reason for this is a subject for a future blog.)

Despite its negative externalities, the creation of wealth benefits humans over time, and the faster the wealth creation, the better. The wealthier a nation is, the more wealth it can and will devote to the search for knowledge and the improvement of the environment and citizen safety. The same is true for scientific inquiry. Those inquiries will include the search for ways to improve society and encourage human flourishing. No amount of research or innovation will solve all human problems, as achieving paradise is beyond humanity’s grasp. But with enough wealth creation, the standard of living enjoyed by our descendants (whether or not they have the sense to recognize it) will be so much higher than it is today that it will be comparable to the difference between the 17^th century and now.

Because all innovators and scientists stand on the shoulders of the innovators and scientists who came before them, standards of living will improve exponentially more rapidly the sooner people innovate and make new scientific discoveries. Thus, we should support and revere the people and things that generate wealth now, but many of the demands people have for their politicians would result in precisely the opposite (but this point will be the subject of many future blogs).

UPDATE: April 9, 2018. A short video version of much of what was said above was just published. “As the Rich Get Richer, the Poor Get Richer”

Updated 02/09/2024