Quote of the Day

by

Chet Richards, in a comment on this thread at Belmont Club:

For an economics professor, Gregory Clark has a very poor grasp of U.S. economic history. The real question is: what have we lost through our current redistributionist (i.e. socialist) policies?
 
LBJ instituted the “Great Society” as a redistributionist scheme. I well remember that at the time critics were saying that LBJ’s program was grossly underfunded and that it would have a very negative impact on the US economy. LBJ not only publicly admitted that the critics were right, he even openly gloated that future generations would just have to live with the consequences. On top of LBJ’s ego we had to suffer from the adoption of the “Limits to Growth” policy that was enacted in the early 70’s by liberal neoluddites including Nelson Rockefeller’s gang (and Richard Nixon). This policy choked off growth during the 1970’s by doubling the Capital Gains Tax.
 
So what have we lost? The long term economic growth of the US from its founding to 1970 was 4.5% through thick and thin. Growth losses during recessions and depressions were compensated by growth overshoots during the recovery period. Since the population was also growing, the per capita growth rate works out to about 3.5%. In 1970 the long term per capita growth rate dropped to 1.5% and has remained at that level ever since. (These days an annual total GDP growth of 4% is regarded as phenomenally good!)
 
Working the numbers for the period from 1969 to 2009 we have a per capita GDP growth of 4x with a 3.5% per capita growth rate. With the true per capita growth rate of 1.5% the per capita growth during this period was actually 1.8x. If we had not had LBJ and “Limits to Growth” our per capita economy would now be about 2.2x larger than it currently is. Factoring in the population growth gives us about the same ratio.
 
Conclusions: 1) Almost all of us have suffered a profound loss of the prosperity that should have been ours. 2) Revenues to the Government would have been substantially larger than they currently are and taxes would have been much lower. 3) Inflation would have been much lower which means our savings would not have been eaten away (and taxed) by inflation. 4) Current policies to expand redistribution are going to create even more loss of wealth and increase in poverty.
 
Shed a tear, folks, for what might have been, and what we likely will still lose.

23 thoughts on “Quote of the Day”

  1. I am confused by this discussion.

    Greg Clark is raising a serious question, which is how we deal with the uneducated in society.

    The Belmont Club accuses him of being anti-Marxist, which I’m sure is true, but I don’t get the ” Heads I win, tails you lose”

    Chet Richards notes that social welfare spending retards economic growth, with which Dr. Clark surely agrees.

    Is there an argument here, or is it a socially awkward mutual admiration society?

  2. I wanted to emphasize Richards’s central point about the enormous hidden costs of our attempts to regulate economic affairs by govt fiat of the type that Clark favors. However worthy Clark’s goals may be, the costs of his proposed means to achieve those goals are relevant. It is not enough to propose a worthy outcome without fully considering the real-world costs and benefits of achieving that outcome. That consideration includes recognizing that hidden costs, including opportunity costs such as foregone economic growth, are real. Most popular discussions of this type involve one side asserting a problem, then proposing a means to alleviate the supposed problem without acknowledging the full costs of doing so, then responding to opponents’ cost-based objections as being motivated by opposition to the outcome.

    Clark is framing the issue too narrowly. The central question in this debate (as in many political debates) should be how to maximize economic growth.

  3. Chet Richards’ linkage of the reduced economic growth for the past 40 years to the capital gains tax rate is problematic. See this chart (PDF); rates were slashed again in the latter part of Carter’s term. Many factors led to our current situation, not the least of which is lower tolerance for risk and the accompanying regulatory burden.

  4. I thank Jay for his contribution.

    Jonathan,

    True, however.

    1.Redistribution of wealth is required to sustain economic growth. To use just one example, think of social security. Social security frees individuals and their children to engage in risky, wealth-generating economic behavior, even if it requires them to leave beheind a steady but smaller income. This is why the Kaiser first instituted, and a major factor in its spread.

    2. Restribution of wealth is required to sustain our form of government. It is no condiecne that support for socialist and communist parties collapsed after the New Deal. The far-Left and far-Right both invest significant efforts into provacatation, instigation, and the like. Eliminating the redistribution of wealth opens us up to significant political risks.

  5. PS: I left out the moral imperative to redistribute wealth. Catholic commentators will already be aware of Rerum Novarum, and to those outside the faith, the argument would be meaningless.

  6. The new encyclical, which I read, and was stumped by, is being interpreted by others who are more capable of understanding the “inside baseball”.

    One writer had this to say:

    The pope does not blame capitalism for the world’s current economic problems. On the contrary, he states unequivocally, “Society does not have to protect itself from the market, as if the development of the latter were ipso facto to entail the death of authentically human relations.” Instead, he stresses that a market economy is shaped and driven by cultural underpinnings. If the culture is rotten, gangster capitalism inevitably flourishes. If it is morally healthy, a socially responsible free market takes root.
     
    The pope is pro-globalization, pro-trade and pro-scientific innovation — even demanding that wealthier countries lower protectionist trade barriers to products from poorer nations. This will lower consumer prices and help boost exports for developing economies.
     
    Yet the pope believes in a redistributive capitalism in which wealth is distributed more equally to the poor and disadvantaged. The state has some role to play — unemployment insurance and local charity, for example. But much of the redistribution should be voluntary and part of a mutually beneficial exchange. In other words, he is calling us to follow Christ’s injunction to take care of the weakest among us.

    Maybe so.

    Fr. Robert Sirico of the Acton Institute has written in a similar way about Caritas in Veritate.

  7. Jay:

    Richards appears to be arguing not merely for the growth-impairing effects of the cap-gains tax but for the growth-impairing effects of high tax rates and of high levels of govt spending and regulation generally. Every one of these tax, spending and regulatory schemes — Great Society, high marginal tax rates, high cap-gains rates, ADA, Clean Air Act, SarBox, etc., etc. — reduces the rate of GDP growth and thus of wealth creation. Compounded over time, these productivity reductions imply that we are MUCH less wealthy than we might have been with less govt. Most people do not realize how much their favored govt programs really cost over time.

    Tdaxp:

    I don’t accept your premises. If wealth redistribution is a moral imperative I don’t see how it follows that forcible redistribution by govt is also a moral imperative. Individuals may contribute their own money as they wish. Having the govt confiscate private wealth by force from some people while at the same time subsidizing other people is not at all the same thing. To argue that it is is like arguing that a robber may be justified in robbing if he gives the proceeds to people who in his opinion deserve it. And that assumes existence of a moral connection between the act of theft and the act of distribution, which it seems to me is a connection that a robber lacks authority to make. (And in the case of govt, the robber is keeping something like 1/3 of the proceeds to distribute to his bureaucratic minions.)

    I reject also your argument for the political necessity of redistribution. Even assuming for argument’s sake that redistribution was necessary in the past, surely it becomes less necessary as per capita wealth increases. We are vastly wealthier than was the USA of 1930, and if we can avoid hobbling our economy with govt interventions we will be vastly wealthier in the future than we are now. I conclude that the best thing that our govt could do would be to promote economic growth by radically cutting tax rates, radically cutting govt spending, repealing regulatory laws en masse and abolishing most of our regulatory bureaucracy.

  8. Wealth distribution that allows most people to benefit from the economic order is a moral imperative. Capitalism does that better than any other system. Inequalities and hardships that are no one’s fault should be addressed mostly privately, but as locally as possible where the government is involved — which the Catholic social doctrine refers to as “subsidiarity”.

    I think Dan is basically correct that America has managed to have a “goldilocks” economy by innoculating itself against European style socialism (so far) with small increments of state intervention that the voters wanted, demanded and considered fair. Social Security was part of that. Workplace safety regulations are part of that. To the extent these policies and others like them are “redistribution” they are also political bargains that provide the social peace that allows our free enterprise economy (to the extent it still is) to work at all. Americans tolerate a remarkable degree of inequality, so long as they think the game is not totally rigged and they can have a decent life. The American people have never been ideological libertarians. To the contrary, Director’s Law of Public Income Distribution indicates that the American public is basically middle-class in its values, and wants government to intervene on its behalf, where necessary at the expense of the rich and the poor. George Stigler’s article on this point is too little known.

  9. Lex,

    The new encyclical is 118 years old by now, so its “On New Things” monicker may be a bit out of date…

    Benedict’s even newer letter is in our Catholic tradition. I’ve discussed it elsewhere before, and I am lazy, so I will just cut and paste this section from Wikipedia for now

    “Let the working man and the employer make free agreements, and in particular let them agree freely as to the wages; nevertheless, there underlies a dictate of natural justice more imperious and ancient than any bargain between man and man, namely, that wages ought not to be insufficient to support a frugal and well-behaved wage-earner. If through necessity or fear of a worse evil the workman accept harder conditions because an employer or contractor will afford him no better, he is made the victim of force and injustice.

    Men fear their health, and the health of their families, and through this necessity and this fear they accept harder conditions (in the absense of redistributionist policies) because a market price affords no better.

    We are blessed to live in a world much better than 1891, with medical advances far beyond what we had then. Then, the rich and poor alike were afraid of a bad heart, or weak lungs. Now only the poor, and those with prior conditions, need to be afraid.

    Jonathan,

    If wealth redistribution is a moral imperative I don’t see how it follows that forcible redistribution by govt is also a moral imperative.

    Certainly the presense of a rich lord whose income is equiavelent to some large fractio of the national income would render redistribution through the tax system irrelevent.

    Individuals may contribute their own money as they wish.

    Yes, but the purpose of charity is to help those who need help, not wish fulfillment of those who have money.

    Having the govt confiscate private wealth by force from some people while at the same time subsidizing other people is not at all the same thing.

    Indeed, one is an effective social intervention, while the other is not.

    Having the govt confiscate private wealth by force from some people while at the same time subsidizing other people is not at all the same thing.

    Certainly one can start from anarchist principles and argue this. Just not Christian principles. The Bible blesses tax policy. The government is a tool, not a thief.

    Even assuming for argument’s sake that redistribution was necessary in the past, surely it becomes less necessary as per capita wealth increases.

    I don’t know why you would think this. No one apart from some misguided liberals and leftists thinks that absolute poverty generates terrorism, or revolution, or any of that nonsense. Indeed, revolutionary classes (whether Communist, Qaedist, or so on) are those that have enough resources to bother with revolution and not enough to obtain progressively higher living standards.

  10. I have always believed that the Catholic writing on “just wages” was wrong.

    “…wages ought not to be insufficient to support a frugal and well-behaved wage-earner…”

    Wages which are not consistent with the marginal product of the worker won’t be paid, or won’t be paid for long. They can’t be. Labor is like anything else that is competitively priced. You can pretend otherwise, or tax someone to give money to the person who is unproductive, but you cannot make a wage be other than what it’s actual value is. This sort of airy-fairy pronouncement that somehow or other the need and good behavior of a worker has anything to do with what his labor is worth has always struck me as pointlessly confusing the issue. You don’t make the world a better a better place by breaking markets that reflect actual value of actual goods and services, including labor, and foul up incentives and make the whole economy less efficient and more wasteful. You recognize that some people cannot hack it in a competitive economy, and make provisions for them, out of political necessity if not out of moral necessity.

    I discussed this, inter alia, here.

    There is a libertarian dream world in which there is no Soft America at all, a world of the future, if only this or that would happen today. This vision beckons half-glimpsed on the horizon, somewhat like the Marxian workers’ paradise, except with cleaner bathrooms and crisp efficiency and no grade inflation. It is an Ayn Randian world of competent “winners,” and no bureaucrats, toadies, or parasites like that half-retarded nephew of the boss working in the mailroom.
     
    But this All-Hard-American-All-The-Time utopia will never be more than a delusion. There will always have to be a pretty big Soft America. There will always have to be a place to warehouse and cabin-off the losers who cannot hack it, who will always be misfits in the cash economy. Otherwise, these losers will have time to brood about their failures, find like-minded losers with grievances, blame society for their inability to compete successfully, and agitate for socialism, or whatever equivalent snake oil is fashionable, thus killing the goose for everybody. Much more prudent and humane to have them all work at the Registry of Motor Vehicles. They pretend to work, we actually pay them, and they don’t start a new Nazi or Bolshevik party or join Al Qaeda. Not necessarily a bad buy.
     
    (Such thoughts are why I am a Conservative and not a Libertarian.)

  11. Lexington,

    I think we can agree that Rerum Novarum requires religious assent from all Catholics. You make a good point, though, that simply dictating a high minimum wage to enforce “wages ought not to be insufficient to support a frugal and well-behaved wage-earner” would not be a lasting system.

    So we have a basic choice, in deciding whether the teaching of Rerum Novarum is understandible. If not, then we will linger in disobedience, but at least do so out of an honest desire that our obedience not “be simply exterior or disciplinary but must be understood within the logic of faith and under the impulse of obedience to the faith.” I don’t think saying that R.N. is inexplicable is necessarily wrong. I’ve previously argued that dietary laws are inexplicable.

    However, I think there is an easy solution here. R.N. is directed toward governmental policy, and instructs governments not to allow wages to fall below a standard of frugal safety & comfort. Therefore, the government should engage in such redistributionist & public-goods-creating policies (social security, public education, etc.) to allow individuals to survive on the wages they receive combined with ambient social support.

    The Church’s teaching here are not “airy-fairy.” They logically lead to practical government policies, whcih can be genreally grouped under the term Christian Democracy. Christianity is a revolutionary faith,which has destroyed a number of social orders. 19th Century Europe is but one world discarded to the scapheap of history.

  12. There seems to be some skepticism about the sensitivity of the economy to the Capital Gains Tax. Let me relate an expert’s opinion on the subject – not my own. In the early seventies, while still an engineering graduate student, I was also working for an investment banker – a very, very successful investment banker. Now that guy was exceedingly smart as well as very accomplished – a PhD physicist who had been on the faculty at Cal Tech before going off to found a couple of significant high tech companies. Also, he was the inventor of the digital volt meter and made a good deal of money from that patent.

    I happened to be sitting at my boss’s desk, one day in the early 70’s, when the word came from the White House that President Nixon was about to sign the doubling of the Capital Gains Tax. A rough approximation of his response was “that stupid SOB, I didn’t think he was that stupid ….. (and on, and on for some time thereafter).” Being young and still somewhat wet behind the ears I asked what was going on. I got a very informative lecture on the consequences of Nixon’s caving in to the liberal faction in Congress. I learned that risk investment money was about to dry up, that the economy was about to stagnate, that we would be facing massive inflation – particularly since the risk money was going to go into real estate and other tangible properties, such as fine art – thereby driving up prices. I learned that the ultimate consequence, until this stupidity was reversed, was going to be major social unrest.

    The reason, he explained was very simple: Most risk investments are failures. In the 1960’s one success had to pay for the investment of nine to ten failures. Doubling the Capital Gains tax meant that one success must pay for twenty failures. In that environment only a fool would take a substantial risk. I took careful note of what my boss told me and watched as all his predictions came true, almost exactly as he had predicted. Of course, LBJ’s redistributionist burdens on the economy significantly exacerbated the stagnation, so there were many other factors, including inflation induced increases in (unindexed) income tax rates, which also contributed. But the Capital Gains Tax is a major inhibitor of the kind of investments which lead to rapid economic growth.

    By the way, that day my boss bailed out of his investment banking business and went back to science to do cancer research – and, I was promptly put out of a job.

    I have read recently that President Carter’s subsequent reduction of the Capital Gains Tax, late in his term of office, was forced on him by a Republican Congress. Guess what, the tax reduction immediately attracted risk capital back into the market and thus spawned the economic take-off of the Reagan years.

  14. Correct me if I’m wrong, but it is my understanding that God, via the Bible, only require a tithe of ten percent—considerably lower than what the government demands. And I’m treading on very thin ice here, but it seems to me if the Catholic Church–or Luthern or any other denomination for that matter, in the guise of “social justice,” supports a larger than 10 percent take, aren’t they modifying God’s word?

  16. Chet – Very true, and part of the seemingly ironic politics of the 1970s, which started with a Republican president increasing taxes and regulation and ended with a Democratic president cutting taxes and deregulating.

    Tdaxp – Hey, I owe you one for that link to chinaSMACK a while ago … it’s great stuff.

  18. Morgan, very glad you are refusing to subject yourself to the TDAXP tyranny! :-)

    So I have some context, are you arguing from a literalist or atheist viewpoint? I am not sure if you are attacking the current tax system, or mocking Christians who do so. As a Catholic, I oppose both literalism and atheism, so I am not sure how best to respond. :-)

  19. Tdaxp, my father told me many years ago: “don’t get into a pissing contest with a skunk.” Not accusing you of being a skunk but why argue with a zealot, so I haven’t the time nor inclination to argue with you, so you are ranting to yourself.

  20. Well, at least thanks for notifying me that you asked a question, then refused to explain your question.

    By contrast, I’ve been waiting 2 weeks for a reply from Shannon Love!

Comments are closed.