Tuesday, May 29, 2012

Three Cheers for Wealth Inequality

One can’t but hear the almost daily drumbeat from the left about how unequal things are in the United States. There is an income disparity between the haves and the have-nots where Wall Street bankers take millions of dollars home to their Greenwich mansions while millions of others work for minimum wage and can’t afford their own home, never mind something resembling a mini-Versailles.

That may be true, but the reality is, inequality exists today, inequality has always existed, and inequality will always exist. Why? Because people are simply different. People have different motivations, different skillsets, different temperaments, different passions, different work ethics… essentially, everyone is different. As such, why does it make sense that everyone would be equal? It doesn’t.

It doesn’t matter if it’s at work or at school or volunteering for a church fundraiser, different people perform differently. In school I remember friends who earned straight A’s with seemingly little or no effort while I struggled to get Bs or Cs. Of course, even though I recognized how challenged I was, I rarely did the work I knew was necessary to merit anything other than a passing grade. I always told myself that I could have earned straight A’s had I applied myself. Maybe I was right, maybe I was wrong, but the reality is that I didn’t care enough about earning A’s to do the work to earn them.

And so it goes in life. Most people get out of it what they put into it. The United States is a nation where, for the most part, people have the opportunity to achieve the success they seek if only they work hard enough and smart enough to get it.

No nation of any size has ever created an environment where everyone was equal in outcomes. Lots have tied however from Revolutionary France to the Soviet Union to Communist China. Economic equality has been tried on our shores as well, from the Mayflower Compact to New York’s Oneida Community to the 1960s communes. All failed to achieve anything resembling a sustainable equality and are gone, other than Communist China, which is anything but egalitarian in any sense of the word.

Today in the United States it’s fashionable for union activists and college students to protest the inequality in society where the rich get richer and the rest of us get poorer. The problem with that logic is that while the rich have gotten richer, so has everyone else. Does it matter if the rich are 25 times richer than the poor if everyone is twice as well off as they used to be? Poverty used to mean that someone had little if any food and possibly a ramshackle place to live if they were lucky enough to have a roof over their head at all. Today, poverty in America means something quite different… Refrigerators, air conditioners, televisions, DVD players and cell phones.

Indeed, in America today poor people have far more in common with rich people than perhaps any point in human history. In 15th Century the King of France had hundreds of courtiers whose jobs were to do everything from cook his food, put his clothes on him to literally wiping his behind when he was done with his business. Paupers not only could never afford the King’s luxury, they didn’t have access to the same basic amenities in life from nutrition to leisure time to entertainment. The discrepancy was not something that could ordinarily be erased by hard work or ingenuity. In this respect Royal France was not so different than most periods of human history. Similar disparities existed in Cleopatra’s Egypt, Victorian England and Tsarist Russia as well.

In America however, not only are those listed in poverty far better off than at any time in human history – and indeed better off than many middle class Europeans today – they also have opportunities for upward mobility that have rarely existed anywhere at any time.

Given that we all have unique DNA, we all live unique lives, we are all motivated by and drawn to different things, economic equality and prosperity tend to be mutually exclusive. As William Bradford learned, imposing equality of outcome leads to economic ruin.

Luckily for Americans and the rest of the world, the United States learned early that a society that seeks to be truly egalitarian doesn’t start by declaring everyone share everything they have or that somehow citizens were to become robots where everyone produced the same amount and consumed the same amount. No, the Founding Fathers delivered something far more powerful. They created a nation where everyone (eventually) was able to harness their unique abilities to invent, innovate and simply work to create a better life for themselves and their families. In doing so the United States has led the march of the improvement in the condition of man over the last two centuries.

With that improvement came great disparities. At one point after the turn of the century when the average American was earning $750 per year, John D. Rockefeller’s wealth was $1 billion, or about 1.5% of US GDP. (For comparison, an equivalent net worth today would be approximately $210 billion, four times Bill Gates’ wealth.) Despite the wealth disparity, the average American was far better off because of Rockefeller as energy prices declined by more than 90% between 1865 and 1910 even while demand skyrocketed. The average American benefited from similar disparities with giants like Carnegie, Vanderbilt and continue today with men like Bill Gates and Jeff Bezos.

The proof is definitive; capitalism makes people richer, both the capitalists themselves and everyone else. As such, the question for the left is: Is their goal to make the lives’ of everyone better or simply destroy the capitalists? Their actions seem to suggest the latter, but if their true goal is the former, they should throw down their “I am the 99%” banners and storm Washington. Not to demand the heads and wallets of the rich, but rather to inveigh against Congress for creating a bureaucracy that hinders a citizens ability to harness their passions, skills and ingenuity to earn themselves millions of dollars as they enrich consumers willing to pay for whatever goods or services they provide.

It’s no coincidence that six of the ten richest men in human history are Americans, three of whom started their lives as paupers. We should celebrate their wealth and success as we benefit from their efforts. Perhaps such celebration would inspire millions of would-be entrepreneurs, inventors and innovators to follow their examples. We should be so lucky.

Monday, May 21, 2012

Barack Obama has turned the US economy into a Hollywood blockbuster. Unfortunately it's Thelma and Louise.

Have you ever seen one of those movies where a car is speeding towards a cliff and just before it heads over the edge the driver jumps out and the car flies into the abyss and maybe crashes and ignites into a ball of flame?

If you haven’t don’t worry, you’re about to live one… and unfortunately for you, you’re not the driver who escapes, you’re a passenger strapped in for the excitement. President Obama is the driver and the way he’s running his campaign, it looks like he’s getting ready to jump…

As you probably guessed, the car in this story is the United States economy. Everyone knows that the economy is… anemic to say the least. The unemployment rate, which is now down to 8.1% is so only because 2.2 million people have given up looking for work since Obama’s inauguration. If those people were still looking for work, if they had any expectation of actually finding a job, the unemployment rate would be 11%.

As bad as two million people being so discouraged that they quit looking for work altogether is, there are a pair of dangers right around the corner that may mushroom that number, and take millions of jobs with them.

The first has to do with taxes. Unless it’s fixed, in January 2013 the tax code is going to create what the Washington Post has christened Taxmageddon. Between the expiration of the Bush tax cuts, the beginning of the taxes within ObamaCare, and a variety of other tax changes, federal taxes are going to increase by a total of $500 billion next year. That means that the government is going to be sucking $500 billion out of the private sector, i.e. your pocket, to fund its turtle tunnels, green energy boondoggles and Las Vegas conventions. To put that amount in perspective, that $500 billion you will no longer have to spend is more than the revenues of Apple, Target, Coke, Disney, McDonalds and Procter & Gamble combined! Now imagine removing that much activity out of the economy… That shouldn’t have much of an impact on jobs.

Would you rather keep that $1,600 (per person) tax hike and spend it as you like on goods and services that benefit you and your family, or would you rather send it to Washington so that the borg can spend it on things like National Public Radio, wealth redistribution schemes and Amtrak? Unfortunately for us we already know what Barack Obama thinks about that.

The second bomb the country is facing is particularly troubling because the danger is so obvious. Why is it obvious? Because we’re still licking our wounds from a mini version of the same problem: the housing crisis driven recession. Although the fundamental cause of the economic meltdown was government intervention in the housing market, the proximate cause was the sub-prime mortgages. Many of those mortgages were of the variable rate type where borrowers received a low introductory rate that would adjust (usually upward) over a period of time or in some cases, abruptly. When rates were low everything was peachy and consumers were purchasing houses at record numbers while investors were borrowing to buy investment properties. The markets were humming along.

Then everything hit a wall. Interest rates jumped, borrowers were no longer able to pay their mortgages, property values plummeted, banks collapsed, and the economy staggered into the “Great Recession”. We were told we were on the brink of a financial meltdown on par with the financial collapse of 1929 and civilization might not survive. Five years later we are limping along, but at least the world didn’t end.

Unfortunately for you and me, Barack Obama has not been smart enough to learn from that recent history. Over the last three years he has piled a total of $5 trillion in new debt on the shoulders of the American people. As bad as that is, that’s not the worst part of it! The greater danger is that virtually every dollar of that new debt is in the form of short term notes. The administration chose this route because, like the homebuyers, they get a great low rate. A two year note today carries a .03% interest rate while a ten year would carry a 2% rate. The problem is, when interest rates spike, all that debt will have to be refinanced, likely at the much higher rates. As an example of the impact of higher rates, consider this: If the government were today paying the 5% it was paying a mere 5 years ago the interest payments alone would be an additional $400 billion a year, almost as much as they will spend on the whole of Medicare this year. That would be like removing from the economy the revenue of Ford, Dow Chemical, Kellogg’s, Google, GAP, the NFL and Microsoft as well. A rate jump from .03% to 5%? No way, that’s not possible. Really? In the two years between January 1978 and January 1980 interest rates jumped a total of 14%, from 6% to 20%. Imagine what $10 trillion financed at 20% might look like!

Barack Obama has set the United States on a Thelma and Louise course, but likely won’t be in the driver’s seat when we actually leave terra firma. Unfortunately for Mitt Romney, the pain that Obama has guaranteed us will likely occur on his watch and there may not be much he can do to avoid it. Indeed, unbelievably, it has the potential to make the current disaster of a presidency look relatively prosperous in comparison.

If he recognizes this in advance, Romney will have the opportunity to steel the American people for the maelstrom ahead while giving them a reason to expect they will get better. That is after all what real leaders do: They prepare their countrymen to persevere through difficult times without needing a scapegoat to make their case; they inspire their citizens to pick themselves up, dust themselves off and go forward to build the prosperous future they seek; and finally, and perhaps most importantly, they seek to reduce the state’s power to frustrate and obstruct the citizenry’s ability to build that prosperous future. Now that’s an action movie I’d like to see.

Monday, May 7, 2012

If Obama can claim credit for killing bin Laden a year ago, why can't he take credit for the economy today?

As President Obama and his administration are constantly telling us, the horrible economy is not his fault because he inherited the “Worst recession since the Great Depression”. One can certainly make that argument. You just can’t get it to stick.

If you could however, what you’d basically be saying is that that 3 ½ years after taking office the President of the United States is essentially helpless to impact the economy. “No, no, no!” his supporters would no doubt respond: “That’s not what we mean! The entire economy, nay the entire world’s economic system would have collapsed if President Obama had not saved us.” That’s simply a 2012 version of the absurd and decidedly non-empirical “Jobs created or saved” measure the administration proffered when it became obvious that their stimulus was a failure.

If the President is not responsible for the economy after three years in office, what are we to make of his taking credit for the killing of Osama bin Laden after just two? The financial meltdown began in 2007 and by 2009 we were officially out of the recession. Yet key pieces of intelligence that led to the CIA eventually locating bin Laden were discovered even earlier, in 2005 and 2007. In addition, critical to the success of the intelligence gathering process was information garnered from Khalid Shaikh Mohammed using the very “enhanced interrogation” techniques candidate Obama objected to.

As Obama seeks a second term so that he can begin to fix the economy, Vice President Biden is there to tell voters the only things they really need to know about the President’s first term: “bin Laden is dead and General Motors is alive”. The President apparently wants to take “credit” for GM as well, despite the fact that the ill advised rescue of the UAW… er… of GM began under President Bush also. But the bottom line is that General Motors is alive, has paid back its loans, and is profitable. Alive, like so many things with this administration, is a relative thing. Yes, GM did pay back its government loans, but the money used to do so came from… other government loans. And yes, the company is currently profitable, but that is in no small part because it received $45 billion in special tax benefits not typically available to companies emerging from bankruptcy. (I’d venture to guess that even the hapless Solyndra might eke out a “profit” if given tens of billions in loans and a $45 billion write off.) The lesson for America from GM and the administration is that it’s OK if a company doesn’t pay taxes so long as its union members get paid.

As we look forward to an exciting run up to the November election, the question is, how is it that a President seeking a second four year term isn’t responsible for the economy 3 ½ years after taking office, but somehow is supposed to be given credit for killing bin Laden a year earlier? Has the Presidency been reduced to a cafeteria plan where the man sitting in the Oval Office gets to pick and choose the issues for which he wants to be held responsible? Does the fact that he takes credit for something mean that we have to agree with his assessment? What about the things he demurs to take credit for? Are we forced to blame them on President Bush or can we pick any scapegoat?

Harry Truman famously had a sign that sat at the edge of his desk in the Oval Office that read “The Buck Stops Here”, in reference to which he once told Naval War College audience: “The President--whoever he is--has to decide. He can't pass the buck to anybody. No one else can do the deciding for him. That's his job.” I’m not sure what kind of a sign is sitting on Barack Obama’s desk, but I wouldn’t be surprised if it weren’t similar to that contemptuous sign you find posted on desks and doors of bureaucrats all across the country: “A lack of planning on your part doesn’t constitute an emergency on my part.” Only in President Obama’s case it reads: “A lack of economic opportunity on your part doesn’t constitute failure on my part.”