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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.”
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Deidre McCloskey’s recent treatise (How the West (and the rest) Got Rich) on was a thoughtful essay on the power of liberty and its impact on economics. For the most part, McCloskey did a fine job explaining classical liberalism (“worthy of a free person”) and how the Great Enrichment — our uplifting out of poverty — really came about only when man began to have the liberty to think new ideas and create them.
There was one section, however, where Ms. McCloskey was incorrect. She indicated in passing the right had championed “Social Darwinism” and put forth concepts like eugenics — but this is incorrect. The idea gained footing during the Victorian Era due to the evolutionist Herbert Spencer, and it was promoted by progressives such as Teddy Roosevelt and Woodrow Wilson in the United States. The idea that people should be left by the wayside in a “survival of the fittest” kind of mentality is particularly repugnant and certainly not one espoused by conservatives or libertarians. Conservatives and libertarians are notoriously more generous; liberals don’t take their own money and give to the poor — they take other people’s money and give to the poor.
Consider for a moment too, the idea of wealth input. When people like Bernie Sanders suggest that wealth is unfairly going to wealthier people — well, how do you determine how much should go to each person? Should it really all be the same? Is that equality? Should LeBron James get the same as the least talented player in the NBA? We should be focusing on the equality of opportunity — the quality that you put in is equal to what you get out of it.
For example, Bill Gates make tens of millions a year and he pays several people $1 million or more a year because they are worth it to him. If Gates paid only the minimum wage, other companies would snap the employees up because of their talents . Gates, in paying some of his employees large sums, has recognized their worth because they are generating whatever output was satisfactory to Gates — for example, a strong ROI for the year.
On the other hand, if minimum wage advocates insist on paying $15/hour just for the sake of paying $15/hour instead of $7.50, why should they? Why should the employer be forced to take on the extra cost if the output isn’t worth $15/hour, if they aren’t generating that kind of value? Thus, with that kind of imbalance, the employer must make changes in other areas of his business to make it work — whether it be one or more fewer job overall, price increases, etc.
If people aren’t being paid $100,000 because they are not worth it to their company of employment, that’s a part of business. But it is patently unfair to make arbitrary wage increases in the guise of “fairness.” Why is it fair to some but not others? Why are the people earning $500,000 not suddenly getting $600,000 if others making less get arbitrary wage increases? Why are they excluded? Is that fair? That is why such policies are inherently unfair. The employer should be able to determine, on his own, to pay what his employee is worth and what his employee can generate — without artificial wage policies or government coercion.
It’s difficult to own a business and stay in business when the government comes along and makes changes to how the company is allowed to be in business in the middle of the game. That is patently unfair and unequal. These types of actions stifle a business’s freedom to do business, which is why McCloskey’s era of the “Great Enrichment” is proving to be on the decline.
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Congressman Dave Brat wrote a stunning Op-ed in the Richmond Times Dispatch (“Immigration is killing Americans’ job prospects“) in which he blames immigrants — both legal and illegal — for the current anemic economy. Rightly citing “meager job growth” and “stagnant wages” as symptoms, he then makes a crass and erroneous conclusion that the problem is immigration.
Immigration is not killing Americans’ job prospects — government policy is. We all know that. Why does Congressman Brat ignore the elephant in the room? Brat talks about statistics and “jobs availability” as if the economy was a zero-sum endeavor and there is a finite amount of jobs available to go around, from which outsiders are taking more than their fair share. That’s absurd.
The reality is that job creation and growth by businesses — signs of a healthy economy — have slowed to a crawl because of 1) excessive and onerous regulations unleashed in the last several years; 2) increased taxes, and the high corporate tax rate; 3) overreaching agencies such as the NLRB and EPA; 4) Obamacare; and so forth.
These are all aggressive, anti-business policies that small and large businesses have had to increasingly contend with in our country. They are the reasons why more businesses are closing than opening and investment has declined. Businesses can’t afford to stay in business, comply with government diktats, and create new jobs.
To go after legal and illegal immigration while simultaneously ignoring the government’s culpability is disingenuous at best and pandering at worst. With a diatribe that strenuously complains about “the presence and availability of immigrants — whether legal or illegal, permanent or temporary — in the job market,” Congressman Brat sounds like he may be setting us up for a Trump endorsement down the road; such a line of ridiculous thinking is more compatible with Trump’s “Make America Great Again” slogan than any rational, logical economist — which is what Brat purports to be.
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Entitlement reform is necessary for the fiscal health of this country, but it is something that no one wants to talk about, much less tackle. How can we begin? How can we open up the conversation and the possibility to reform and improve our social security system?
One step in the right direction would be to treat Social Security as a true retirement plan, and not as a wealth transfer system that it currently is. This could begin with reclassifying the payroll tax. The majority of the payroll tax covers Social Security retirement benefits. If we actually used it (or at least most of it) for that individual’s social security retirement, everyone’s perception would change. Instead of being viewed as a hated tax (just ask any young person who has received their first paycheck), it would be viewed as a desirable saving for their future!
A move in this direction could be helped by a characteristic of the present structure. The employer and employee contribute equally to the Social Security Tax. If the individual’s part went towards his personal retirement, the other part could go towards defraying the past obligations that are coming due. If we had done such a thing 20 years ago, the entire system would have been fixed. . Unfortunately, the present situation would probably require some portion of the individual’s portion to also go towards paying the ever growing obligation for past unfunded promises. It’s that dire! And it gets worse every year.
Let’s stop treating Social Security like welfare or wealth transfers and start treating it like a retirement system. It’s our money anyway, even though the government wants to act like it is being generous when it gives us back our money. This would lessen the loose-and-fast accounting gimmicks that contribute to the fiscal mismanagement of Social Security anyway — and may move it away from its impending insolvency.
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Our Social Security System is bankrupt. In fact, there is not enough money in the entire world for the United States to make good on its entitlement promises to its present and future retirees. And one of the key reasons for this is that the government uses a fraudulent, incompetent accounting method to report its costs.
As a CPA, it is frustrating to hear Social Security repeatedly being described as a pay-as-you-go (“PAYGO”) system, which gives credence to something that is terribly incorrect. PAYGO operates by calling all social security payments received by the Government in a year as income, and all monies paid out as expenses. It does not account at all for the fact that millions of workers are earning billions of dollars of Social Security pension every year, but since it will only be paid to them in the future, PAYGO ignores it! It would be as if your local mom & pop store promised its employees a retirement pension, but never recorded it as an expense and never put aside any money to pay for it when it would come due. This is not only totally unacceptable to the accounting professions, the SEC, and the Department of Labor, but it would be a criminal violation with jail time for any corporate officer allowing it.
The fallacy of calling it PAYGO is that it reports employees contributions as income, but the purpose of these payments is to pay for their ultimate retirement pension – yet none of this obligation to pay future benefits is recorded.
We need to be including in our current budget the amounts we are promising to pay in the future! The promises that we’ve made in the past — what we are paying out today — are not a part of this year’s costs – these are old liabilities and are part of our already existing debt. The US debt is currently being reported as just over $19 Trillion. When the real social security debt is added, the true National Debt becomes almost $60 trillion. (As an aside, Medicare payments and benefits are treated the same as Social Security – if the unrecorded Medicare existing debt were also properly included, the National Debt would be over $100 Trillion – way more money than exists in the entire world!)
It is clear that these promised benefits have ZERO chance of ever actually being paid. And the longer our legislators allow this fraud to continue, the worse it will be for ourselves, our children, and our grandchildren.
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A few weeks ago, the Feds trotted out a statistic aimed to bolster support for the fledgling Obamacare legislation. While many Obamacare exchange groups have discontinued coverage or announced double-digit premium rate hikes, federal officials announced that the uninsured rate is now below 10% in the first time in history.
What the Obama Administration failed to announce and Wall Street Journal writer Louise Radnofsky did not know or mention, is that a reduction from 16% to 9.1% falls below what the predicted success claims were supposed to be. Obamacare was written and executed on the premise that the uninsured would fall to 5%, which was supposed to be justification for implementing such an onerous, convoluted, expansive law.
Now, six years later, we can add the 9.1% statistic to the pile of other Obamacare stats that missed their targets repeatedly; By this time, “the Congressional Budget Office (CBO) projected that President Obama’s centerpiece legislation would result in an average of 201 million people having private health insurance in any given month of 2016. Now that 2016 is here, the CBO says that just 177 million people, on average, will have private health insurance in any given month of this year—a shortfall of 24 million people.
Additionally, the CBO has significantly altered its estimates for what 2016 would have looked like if Obamacare had never been passed. In 2013, the CBO projected that, in the absence of Obamacare, 186 million people would have had private health insurance in 2016, and 34 million people would have been on Medicaid or CHIP. The CBO now maintains that, in the absence of Obamacare, only 168 million people would have had private health insurance in 2016 (a reduction of 18 million people from its 2013 projection), while 55 million people would have been on Medicaid or CHIP (an increase of 21 million people from its 2013 projection). Somehow the hypothetical non-Obamacare world has changed between 2013 and 2016 projections. (The CBO doesn’t explain how this could have happened.)”
We don’t need to be celebrating these hollow victories. We need to be relentlessly reminding the electorate that this monstrosity, crafted and voted on by our Democrat Senators, has been one enormous failure after another — administratively and financially.
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As a tax practitioner, I have been following the IRS scandal since the beginning. Here’s the latest update — the list of IRS target have been released, 3 years later. From the Washington Times:
More than three years after it admitted to targeting tea party groups for intrusive scrutiny, the IRS has finally released a near-complete list of the organizations it snagged in a political dragnet.
The tax agency filed the list last month as part of a court case after a series of federal judges, fed up with what they said was the agency’s stonewalling, ordered it to get a move on. The case is a class-action lawsuit, so the list of names is critical to knowing the scope of those who would have a claim against the IRS.
But even as it answers some questions, the list raises others, including exactly when the targeting stopped, and how broadly the tax agency drew its net when it went after nonprofits for unusual scrutiny.
The government released names of 426 organizations. Another 40 were not released as part of the list because they had already opted out of being part of the class-action suit.
That total is much higher than the 298 groups the IRS‘ inspector general identified back in May 2013, when investigators first revealed the agency had been subjecting applications to long — potentially illegal — delays, and forcing them to answer intrusive questions about their activities. Tea party and conservative groups said they was the target of unusually heavy investigations and longer delays,
Edward D. Greim, the lawyer who’s pursuing the case on behalf of NorCal Tea Party Patriots and other members of the class, said the list also could have ballooned toward the end of the targeting as the IRS, once it knew it was being investigated, snagged more liberal groups in its operations to try to soften perceptions of political bias.
“As we have identified in our filings in this case, important questions still exist regarding changes to the IRS‘ case listings that occurred after theIRS learned that the [inspector general] and congressional investigations had begun,” he said. “Based on these changes, which to date remain unexplained, a very real possibility — if not probability — exists that theIRS modified its targeting in light of the investigations, packing its own internal lists of targeted groups to support its preferred narrative, including by adding ideologically diverse groups.”
He said if that did happen, it would have “tainted” the list the IRS has now released.
The IRS declined to comment, saying its filing spoke for itself.
A series of investigations found the IRS did ask intrusive questions and did delay applications for years, in violation of policy. But so far no investigation has found any order from the White House to conduct the targeting.
‘Tea’ and ‘patriot’ groups
Sixty of the groups on the list released last month have the word “tea” in their name, 33 have “patriot,” eight refer to the Constitution, and 13 have “912” in their name — which is the monicker of a movement started by conservatives. Another 26 group names refer to “liberty,” though that list does include some groups that are not discernibly conservative in orientation.
Among the groups that appear to trend liberal are three with the word “occupy” in their name.
And then there are some surprising names, including three state or local chapters of the League of Women Voters — a group with a long history of nonprofit work.
Some of the most active and prominent tea party groups snared in the targeting aren’t on the class-action list. At least some of them opted not to be part of the joint legal action to preserve their own lawsuits.
Congressional Republicans say IRS Commissioner John Koskinen, who was brought in by President Obama to clean up the agency after the targeting scandal, has failed — and even misled Congress during the investigation. Some Republicans are even pursuing impeachment against Mr. Koskinen, accusing him of defying a subpoena for former senior IRSexecutive Lois G. Lerner’s emails by allowing computer backup tapes to be destroyed.
Even outside of impeachment, the House GOP has proposed a new round of budget cuts for the IRS, aimed at trying to deliver a message that Mr. Koskinen’s tenure has been unacceptable.
And the tax agency is still defending itself in a series of court cases. In addition to the NorCal class action case, the federal appeals court in Washington, D.C., is currently considering an appeal by tea party groups who argue the targeting is still going on.
“One thing remains clear: Continued litigation is the only way to force theIRS‘ hand in order to expose its targeting scheme that was coordinated with the help of the DOJ and other federal agencies so that we can obtain justice for those patriotic Americans who were unconstitutionally targeted by their own government,” said Jay Sekulow, chief counsel at the American Center for Law and Justice, which is representing some of the plaintiffs in the appeals case.
In yet another case, the conservative group Cause of Action has been pursuing the IRS to turn over documents the group believed would show White House officials requesting secret taxpayer information on conservatives.
But in a filing Friday, the IRS said it has conducted a final search and can’t find any evidence that the White House either asked for or received protected information.
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Grim news from the Wall Street Journal:
“The U.S. job market notched its weakest monthly gain in more than five years, knocking down expectations for a Federal Reserve rate increase and stirring worries about the seven-year-old economic expansion.
Employers added 38,000 jobs in May, the weakest performance since September 2010, the Labor Department said Friday. The unemployment rate, obtained from a separate survey of households, fell to 4.7% from 5% in April largely due to a steep decline in labor-force participation.
Revisions to previous payroll data showed employers added a combined 59,000 fewer jobs in April and March than previously reported. That brought average monthly job growth in the past three months to 116,000, a sharp slowdown from the average growth of 219,000 over the prior 12 months.”
Economists had forecast payrolls rising by 164,000 in May and the unemployment rate falling to 4.9 percent.
And more perspective: “A record 94,708,000 Americans were not in the labor force in May — 664,000 more than in April — and the labor force participation rate dropped two-tenths of a point to 62.6 percent, near its 38-year low, the Labor Department’s Bureau of Labor Statistics reported on Friday.
When President Obama took office in January 2009, 80,529,000 Americans were not participating in the labor force; since then, 14,179,000 Americans have left the workforce — some of them retiring and some just quitting because they can’t find work.”
As I have stated numerous times over the years, the government’s stranglehold on small businesses in the form of wage meddling, over regulation, and tax increases have kept the economy from being able to recover properly. It will still continue to limp along until policy changes are made.
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One of the unintended results of minimum wage theory is how the artificial wage increase affects those workers who were not recipients of the government’s generosity. The sudden jump to $13 or $15 an hour for the lower income workers does not translate into the same sort of wage increase for the middle income workers — and this act breeds contempt. Those that have worked hard and earn a decent wage see below them receive this pay increase, and they understandably now want the same kind of jump. And why shouldn’t they? Should they be able to demand the same wage treatment? Will this beget a slippery slope? Or does this expose the very reason why government should stay out of the business of picking winners and loser among workers in the private sector?
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The Libertarian Party just nominated Gary Johnson for President and William Weld for Vice President on the Libertarian Party ticket at their convention.
This is very interesting. With these two men who have extensive governing experience, we have clearly the best candidates running for office but they won’t win because they just won’t get enough traction. It will be interesting to see if they pull more from the Democrats or the Republicans.
Polls show them between 8-12% right now. If they get to 15%, they are allowed to participate in the debates. For the sake of healthy policy discussion during the election season, I hope they meet that threshold.
