Two common cries often heard in liberal progressive quarters are that capitalism produces inequalities and inequities and the corollary argument that income inequality has been growing over the past 30 years because of capitalistic policies. Many years ago University of Chicago economist Casey Mulligan began addressing these issues by pointing out that we should not measure economic wellness by an income standard, but rather by an “ability to consume standard”. In other words, a welfare family having no income may be able to consume $45,000 worth of goods and services. Think food stamps (SNAP), rent support, Medicaid and CHIPS, transportation stipends, etc. A person making the minimum wage making $15,000/year is able to consume much less. If they could make the new purposed minimum wage, they could make $30,000/year still far less than what they could get in transfer payment benefits. Why work?
But here is what is important. The difference in the ability to consume has closed down significantly within the lower 60% of people living in several of our States. Last week in the Wall Street Journal the former Senator Phil Graham followed Mr. Mulligan’s lead in pointing out that traditionally we have been defining income inequality based on Gross income and when taking all levels of income into account we are in fact observing greater discrepancies between high and low wage earners. But wait—If we use net income after taxes for those that actually pay taxes, and income including government transfer payments—all forms of welfare including Medicaid, that number becomes almost static. The ability to consume has stayed the same over 30 years. But here is the kicker—that difference is not just because those receiving benefits are getting more—which they are, but because those in the middle quintiles are seeing less after taxes. Worker’s ability to consume has decreased. People on welfare’s ability to consume has increased. Why work?
One must also consider that the top 2 quintiles of income pay 82% of income taxes, and the majority of property taxes, and the bottom 40% pay no taxes at all—they don’t even pay grocery taxes if they are in SNAP programs. People in the lower tax brackets are paying nothing and those in the middle tax brackets are paying more.
But herein lies the problem and we are seeing it in States like Hawaii with huge welfare populations dependent on government largesse to support their programs. There is now significant upward pressure on wages for workers in the middle of the bell-shaped curve, because they could do nothing and have the ability to consume—a family of 4 could make over $80,000 for example. Why should the breadwinner work for less than $100,000? This raises the cost of living by increasing the cost of goods and services that are affected by employee wages that account for 50% of consumer costs.
I point this out in the context of my original statement and that is it is not capitalism that causes income discrepancies, but rather liberal progressive programs. In an article entitled INEQUALITY BY WAY OF GOVERNMENT in the March 30th WSJ Andy Kessler makes similar arguments to those above. Five areas of progressive liberal policy are what are driving income inequality and upward mobility. First is education—specifically the teachers unions. In Chicago the average teacher makes $108,000/year and the head of the teacher’s union makes $500,000/year. Reading and math scores are amongst the lowest in the nation and a chance of a child going to college coming out of the Chicago public school system is near the lowest of any city in the country. Is that value for price paid? That only hinders upward mobility. The only people that see upward mobility in that system are the teachers who aren’t teaching. A second favorite of progressives is their stranglehold on occupational licensing. There are over 1000 job titles that in at least one state require a license. Hairstylists, pedicurists, even in the legal and medical professions an occupational license is a barrier to entry—credentialing is a better solution. Third is a favorite of both Republicans and Democrats—land use restrictions. Try filing for an easement on one’s property, or ask for a new solar or natural gas hookup. Whatever you do, don’t let your grandchildren sell lemonade or old retrieved golf balls over the backyard fence to golfers coming by—actually I think we got that fixed in Idaho this year. The price of farmland is at an all-time high in the US because of expanding “impact zones” by local municipalities at the same time commodity prices are at a 10 year high. How does a young farmer without family connections get into the game? Government gets you every way they can. And finally the welfare transfer programs themselves pay out so much to recipients that they can now compete for income (based on ability to consume) with entry level jobs. On our own Idaho Health Insurance Exchange, I was disappointed to see that there is a 90% reenrollment rate implying that this group of people are not moving up the income ladder as fast as I would believe. More research needs to be done on this. Are the ages of recipients staying the same or increasing? Is the Advanced Premium Tax Credit (APTC) in anyway working as a disincentive for workers to pursue higher wage opportunities? Are either employers or employees gaming the system—working off the book jobs or placing workers in part time positions so they are encouraged to seek exchange products and the APTC? Or all of the above? When I joined the Exchange Board it was my hope and I know Governor Otter’s that the Exchange would act like a bridge for upwardly mobile workers and their families and serve as a backdrop in economic downturns. That was in my opinion an important function of government—I actually tried hard to privatize the exchange but wasn’t very successful.
And my favorite liberal progressive disincentive—minimum wage. By increasing the minimum wage to $15.00/hour the Congressional Budget Office estimated that 1.6 million jobs would be lost. Milton Freidman stated 40 years ago that “minimum wage laws are the best way for employers to discriminate between people who don’t have skills”. Access to entry level jobs is a primary means for young people to begin the journey on the ladder to upward mobility and be removed from the yoke of government dependency.
So next time you hear about capitalism being the cause of inequality or a lack of upward mobility remember the above points. And also remember Milton Freidman’s charge and I paraphrase that, nowhere in the history of the world has the yoke of grinding poverty, slavery, and indenture hood been lifted from the backs of men than in places where capitalism has been allowed to thrive.
MAGA “Fight Like Hell”
4 replies on “Why You’re Better off Not Working”
Dear Dr. Livingston
Great article, you make some very good points in your article. I would like to add to the discussion as to the efficacy of capitalism and maybe define a little better just what we are talking about and not talking about when we speak about capitalism. In explaining this I am revealing a part of my personality as I find myself always analyzing things to the point they are simple enough that I can understand them. I believe Einstein was right in his exhortation, “If you can’t explain something in simple terms you don’t understand it well enough”. Some people may be able to understand things at a high level of complication, but that isn’t me. I must break things down to a simplistic level in order to understand. I think more citizens would engage in the political process if they developed the understanding of how crucial it is to break things down to their simplest components, thereby developing an understanding of the processes that control their lives.
I developed a keen interest in macro economics back in the early 80s when I started earning enough money to start investing. Prior to that I was stationed at DM AFB in the 70s and got my pilots license and finished my college education in tandem with my best friend who got out of the USAF and became a stock broker. I got stationed near my friend in So Cal and we would get together and talk and talk and talk about investing and the economy. He would give me articles, actual paper articles, I still have today, that were written by the greatest thinkers of the 20th century. I noticed how so many of the great economic thinkers would give great homage to the great one, Adam Smith, who wrote the classic “Wealth of Nations”. Since I am one who analyzes to the granular level, I decided to read “Wealth of Nations” and any other writings of Adam Smith so I could inform myself on how exactly an economic system was supposed to work; that understanding would then greatly help me in my future investing career.
I remember how my friend and I would use the metaphor of a rising tide and the economy. A rising tide raises all ships and a lowering tide sinks all ships and also shows who was swimming naked. The naked part being a Warren Buffetism if I am not mistaken. All of the teachings and lessons of economics are based on a system of free markets which employ what Adam Smith called “The Invisible Hand”. This invisible hand was always at work in free markets and is, what in many ways, differentiated Western Civilization from the rest of the purely, centrally controlled economic systems in the world starting at the end of the Middle or Dark ages. Although there was Monarchical rule, the people were far more free to engage in free market systems in the West as long as proper taxes were paid to the rulers. This gave a huge advantage to the West over the rest.
So what is the “Invisible Hand”? It is really competition, the one aspect of an economy that differentiates success from failure in that economic system. Basically, the citizenry, engaging in commerce and shopping around for and choosing the most agreeable price for those items or services they buy, is in a nutshell, the invisible hand. That shopping around causes each merchant or service provider to compete for each customer and is responsible for each merchant or service provider stepping up their game and trying to outdo or compete with others in their field for the limited shoppers available in an economy. This competitive process causes huge efficiencies in an economic system, as merchants and service providers are always innovating and working hard to provide excellence in their field, and is what is responsible for, in many cases, the extreme economic success the West had over the rest of the world starting from around 1500 AD IMO. In addition and in contrast with centrally controlled economies, free market economies also develop huge efficiencies by making each transaction at the lowest level, the value for value exchange level; whereas, centrally controlled economies make decisions concerning the value of money, for instance, somewhere far and away displaced from the actual value for value transaction event and therefore virtually always make very bad decisions and degrade the capabilities of the economic system because they are not engaged in the competitive process. The individual who is in a competitive struggle with merchants and service providers will virtually always make the right decision as he is fully aware of the minute details of the transaction and he has skin in the game so to speak. Without competitive forces an economy will wither and die.
The term “Captialism” was coined by Karl Marx and still is used as a pejorative in many ways by those who choose not to compete or believe, as their collectivist indoctrination has taught them in the failed Western reeducation centers otherwise known as public education, that collectivist, centrally controlled effort is superior to free, individual effort. Truthfully, capitalism is nothing more than free markets. The huge problem with collectivist, centrally controlled effort is the fact that there is no competitive process involved with the decision making. Centrally controlling, collectivist, bureaucrats have no personal interest in the outcome of the millions and millions of transactions for which they are making decisions. An example of this kind of centrally controlled lunacy is the minimum wage. A competitive process would make sure that a burger flipper is worth more to the merchant than the actual flipping process in which the flipper is engaging. How can a bureaucrat make the decision for the merchant as to what the flipping process is worth? He can’t and his actions do nothing but make the economy inefficient.
So, unfortunately, today, I must hit you with a bit of truth about capitalism. We don’t live in a capitalist – read free market – society, not even close and that is a realization that every free thinking American should realize and understand. The consequences of this reality will have huge ramifications for our nation. A few of those ramifications I believe will be a continued decline in, as we have seen over the last 2 decades, GDP, and also huge amounts of unemployment which has been in a huge up trend during the last two decades but was covered up by the Bureau of Labor Statistics, otherwise known as BLS or we could just shorten that title to BS. The real unemployment rate today is U6 nothing else. U6 would have been the stat used for most of my life as the unemployment rate but centrally controlled collectivism can only survive with the use of deception.
Our society has today turned away from the excellence Western Civilization demanded for most of her existence by turning away from the competitive processes I and all so called “Baby Boomers” grew up with. In the old days, parents demanded children work hard and engage in competitive behaviors. Today, parents want to be nice and facilitate their kids drive toward indulging in comfortable, noncompetitive actions. Besides, most parents don’t raise their kids and instill competitive values in their kids anymore as both parents work and start from infancy dumping their kids at government controlled child care indoctrination centers. The parents themselves want their two paychecks and don’t understand the devastation they are causing to their children and their nation. A kid is ID and has limited ability to teach himself uncomfortable, competitive skill sets.
No, the classic definition of socialism is, government controlling the means of production. Well today, no production gets done without debt in the form of green pieces of paper, or should I say currency, as the current from the wall which drives the computers at banks which is where the vast majority of debt based currency actually resides. Our government has decided that printing money is a reasonable approach to centrally controlling all aspects of our economy, the hell with competitive forces. Since all production today is accomplished with debt based money printed by the government, I think it is easy to make the logical leap that we live in a socialism today and not a capitalist system.
Since competition is such a major part of capitalism – read free markets – I would put forth that the Chinese economy in many ways is far more capitalistic than the American economy. With more billionaires than any economy on earth, you certainly can’t, (with the exception of useful idiots) call the Chinese system communist. Chinese kids competitive efforts are legend.
If America continues to be noncompetitive in her manufacture of semi conductor chips, rare earth metals, all kinds of plastic and metal parts of every kind, you can kiss goodbye a free America for your kids in my opinion. On the other hand, if we can understand the problems that face our once great nation, we can turn it around and “Make America Great Again”, USA, USA, USA. If you don’t say America First you are saying China First. Trophies for everyone is pure ignorance.
One more thing I forgot to say is that although you have losers in a competitive economic system, those losers don’t stay losers for long if they have been properly taught to pick themselves up, dust themselves off, and figure out how to do it better the next time. A good example of how this process works is a man named Ernest Garcia who happens to be the richest guy in Arizona. He went totally bankrupt in the 80s during the S&L fiasco but, following his misfortune, started out selling cars at lots called “Ugly Duckling”. I remember those lots from back in the day when I would visit Arizona. From there he got into the lending side of the business and never looked back.
Unfortunately, today, it would be much harder for citizens to start a business and compete as the Federal controllers have injected their historically failed ideas of central control into our economy. The bureaucratic load (designed by central controllers to ensure their egalitarian designs rather than competitive forces move the markets) that is put on the back of entrepreneurs is a huge barrier to hard working, competitive people who want to succeed.
There are certainly problems with businesses becoming too successful and monopolizing (as that is there natural goal and must be tempered by govt) but anti trust laws have been great and continue to help ensure competitive forces are not extinguished in an economy.
Reading that would facilitate your understanding of the philosophical constructs that control your lives is: Capitalism, Socialism & Democracy by the late great “Joseph A. Schumpeter”. You can download it free from the internet. It is tough to understand but fortunately there are many other texts that clarify many of Schumpeter’s thoughts.
Schumpeter is the economist who developed the concept of “Creative Destruction” which states that there must be losers in an economy but that process of losing makes the economy stronger as it informs the participants what not to do in the future.
I have read Mr. Schumpeter’s book and it is in my library. I agree with everything you say above and in fact the USA is out of the top 10 “Capitalist” economies. My love of economics started in College where my economics Professor was Belwier Singh who was the CFO of National Cash Register. I was an organic chemistry major and your idea of breaking complex issues down to their most fundamental components was how I was taught organic chemistry. Each reaction could be broken down into a series of simple equations and then reconstructed and placed into a bigger equation etc. This is called derivational thinking and is something most people in our society have not developed. The concept of unintended consequences and opportunity costs alternative investments is appreciated by housewives, small businessmen and ranchers who everyday make such decisions, but few politicians or heads of government agencies have such wisdom..
If you don’t believe me just listen to IDAHO IN SESSION on PBS and you will see the “Peter Principle” in action. Thank you for your comments
This is the type of malinvestment that happens when government controls the economy and financial markets without free market forces engaging in price discovery.
https://www.cnbc.com/2021/04/15/theres-a-single-new-jersey-deli-doing-35000-in-sales-valued-at-100-million-in-the-stock-market.html