by | ARTICLES, BLOG, ECONOMY, FREEDOM, GOVERNMENT, HYPOCRISY, OBAMA, POLITICS, TAXES
My friend Fred Smith over at Competitive Enterprise Institute (CEI) wrote a nice piece on the subject of income inequality.
Smith discusses the common beliefs and untruths of the topic, reminding us that “to the extent that inequality is a problem, it is because people are kept from working, saving, and investing in ways that make the most sense for them by bad government policies.” I have reprinted his piece in its entirety below:
“Despite living at a time of unprecedented decreases in poverty around the world, we’re witnessing a seemingly unprecedented increase in worry about income inequality in wealthy countries like the United States. And, not surprisingly, capitalism and its practitioners are often said to be to blame. When the news media and the general public look to the nation’s business leaders for an explanation, however, the response is rarely inspiring.
Whether it’s Fortune profiling “7 Billionaires Worried about Income Inequality” or Chief Executive listening while “8 CEOs Weigh in on Income Inequality,” we hear a lot of platitudes about how income inequality is a divisive social problem that “has to be dealt with,” followed quickly by a mumbled caveat about how this vitally important challenge, of course, does not require drastic measures like capping CEO pay or anything that would impact the competitiveness of one’s own firm.
On the other hand, we do hear a few high-profile CEOs advising political leaders to deal with inequality concerns by doubling-down on existing anti-poverty programs. Morgan Stanley CEO James Gorman is pushing an increase in the minimum wage and Berkshire Hathaway’s Warren Buffett is recommending an expansion of the Earned Income Tax Credit (EITC). Unfortunately the fact that higher minimum wages actually result in fewer low-wage jobs gets only slightly more acknowledgement than the fact that the EITC fraud rate is one of the worst of any government program. More of that? No, thank you.
So what should the titans of Wall Street be saying about this terrible scourge of some Americans being richer than most other Americans? Let’s start with the basics:
First, inequality per se in a game of envy and class warfare. Any objective measure of poverty or deprivation deserves its own assessment and debate and, if appropriate, its own public policy response. No one ever went without food, shelter, clothing, education, or healthcare just because the Gini coefficient was higher than 0.57. As my colleagues Iain Murray and Ryan Young discuss in a new study “People, Not Ratios,” statistical measurements of inequality are no substitute for focusing on the quality of life of real people. Ryan Bourne and Christopher Snowdon of the UK’s Institute for Economic Affairs come to the same conclusion in their own study, also released this week.
Second, it’s better to lift the floor than lower the ceiling (and again, that’s doesn’t mean raising the minimum wage). The best way to help people earn a better living – let’s consider a revolutionary idea – is to get rid of the obstacles that block people from earning a better living. This means, among other things, repealing an array of labor rules and licensing restrictions, both at the federal and state level. And, as Bloomberg View’s Megan McArdle reminds us, we can’t fall into the trap of thinking “entrepreneurs” have to be unicorn-founding tech gurus. Anyone who finds a new way to make money (or an old way to make more money) can be an entrepreneur, even if they never give a TED talk or buy a mega-yacht.
Third, economic inequality, the measurement of which is itself the subject of contentious debate, rises and falls for a variety of reasons. Jim Pethokoukis of the American Enterprise Institute points out that the 1990s economic expansion, the years before the Great Recession and dotcom bust that we’re all supposed to be pining for, also saw a significant increase of inequality, while the mortgage meltdown gave us a decrease. Inequality rose and fell long before Thomas Piketty’s Capital in the Twenty-First Century made headlines for becoming the most unread book of 2014, and the self-righteousness pandering about it that followed hasn’t improved anyone’s quality of life (unless, of course, you’re an Ivy League graduate student looking for a research grant).
Fourth, prosperity is not automatic. For thousands of years, most of the human race was dirt poor, and then, a couple of hundred years ago, living standards began shooting up. First in Europe and the U.S., but then dramatically all over the world. We have a good idea why this amazing thing happened, and the economist Deirdre McCloskey gives the best explanation of it: liberty. A political and social system that allows everyone to seek their chosen goals according to their own merits with as few restrictions as possible has moved the world from perpetual poverty to widespread prosperity. Hard work, commerce, and thrift – what Deirdre calls the “bourgeois virtues” – will get you a happier, healthier, and more peaceful society every time. Whatever brilliant new plans for reordering the economy that the inequality activists come up with, we ignore this lesson as our peril.
So there you have it, my CEO friends. If your critics come at you with questions about what you or your company are doing about inequality, tell them you’re selling goods and services to willing customers. You’re not cheating or defrauding anyone. You follow the rules and pay your taxes – even when they finance less-than-effective government programs. To the extent that inequality is a problem, it is because people are kept from working, saving, and investing in ways that make the most sense for them by bad government policies. We have real problems and challenges in this country – inequality, on its own, is not one of them.”
by | ARTICLES, BLOG, ECONOMY, FREEDOM, TAXES
It seems like the White House and media these days are spending a lot of their energy discussing disparity between the haves- and have-nots. The phrase “income inequality” is especially being used more frequently as a means to continue the class warfare rhetoric and is absolutely certain to be a major theme of Obama’s State of the Union Address this month.
Many explanations are bandied about in an attempt to show that “devious policies” are causing the wide gulf between higher and lower income earners. They include the vague and general terms such as “special tax benefits for the wealthy”, “corporate welfare”, and a “tax system that favors those with higher incomes”. Though these targets are great for talking points, they fail solidly on substance.
There are no virtually no special benefits for the wealthy — only higher tax rates, phased out tax deductions, and added surtaxes that lower income earners do not have to contend with. As for corporate welfare, though it does exist, it only affects a few crony capitalist-type industries and companies out of the millions of small businesses which form the backbone of our economy (think: GE, green energy, electric cars). What’s more, the tax system clearly favors those with lower incomes, not higher, with lesser rates and more deductions and tax credits available. It has been shown clearly and indisputably that the US has – by a large margin – the most progressive taxes in the world (yes, far more progressive than even Europe and the Scandinavian countries). Though there is income inequality in America, why it exists is not what you think.
The simple reason is this: unlike people in the fastest growing countries, and unlike our own citizens in prior generations, the current middle and lower income classes in America have lost their inclination to personally invest in their future. I would argue that much of this is because the growing government welfare system is stripping individuals of their need to prepare and plan ahead, and a wide safety net also exists. For the most part, it is only the upper middle and higher income individuals — those who are not the beneficiaries of government welfare and those with more entrepreneurial orientation — that are forcing themselves to save and put this money at risk into investments for their future.
Much of China’s current economic success can be directly attributed to the financial attitude of their citizens with regard to investing. Almost all earners, including and especially the middle and lower income ones, keep a certain amount of income each month and invest it in both entrepreneurial endeavors and the existing equity markets. It is common for even the minimum wage earners to save at least 10% of their income! Large or small sum, they regard investment as a priority and a path to prosperity.
I have a close relative who is an owner and executive of a substantial manufacturing operation that he started in Shenzhen, China because of its business friendly environment. I’ve heard from him many times that he went into business, not to comply with government regulations, but to make things. And part of that business friendly environment is the people. He has been pleasantly surprised by the careful frugality of the owners and their passion to invest and grow– a sentiment extends to, and is practiced by, even their lowest paid workers.
Contrast this to the present state of affairs in our country. We have not been saving– we have been borrowing for more than a generation now. Citizens have mortgaged their future by consuming continuously — while investing nothing — and passing on that example to the next generation. We are turning into a country where people will begin to wonder why they should invest, if it’s just going to be taken away from them in the long run by those who do not, or go into a market that is wholly unstable.
People are encouraged to spend as if consumption is a good thing , but truly, it is investing that is far better for individuals and for the economy as a whole. When our government pushes measures such as extending unemployment benefits, food stamps and other welfare programs, it reinforces prolonged financial dependency. It is government policy aimed in the wrong direction as recipients have harder, not easier, obstacles to overcome.
The biggest problem that this country has to deal with regard to moving people away from a culture of dependency is that it continues to be demagogued by the Left for the precise reason that it easily mischaracterizes those who might being against such policies as “insensitive” and as being against the “less well off”. But many who are opposed to such policies merely recognize that success of investment, independence, and upward mobility are making other countries greater while we persist our slide into wider dependencies and economic decline.
In order to get the middle class back on track, we must focus our efforts and rhetoric on reminding ourselves that this country was built upon those who were willing to invest their time and money to become great. It is the true source of upward mobility – and those that do not do their fair share will be left behind by those who do. This is what truly drives at the heart of income inequality in our country.
Investment is what made our country thrive and it is the only thing that will properly sustain our country’s financial future.
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