Monthly Archive for November, 2006

Right Vs Left View Of The World

Michelle Dion, writing in her blog, details the troubling circumstances Mexico is in:

As the time nears for the swearing in of Mexico’s new President, the PAN’s Felipe Calderon, the situation is not looking good. Earlier this month, the PRD’s Lopez Obrador had himself sworn in as President in an unofficial ceremony. Yesterday, a small fight broke out in the Congress (for the leftist version of events) when members of the PRD tried to take control of the dais and the PAN stepped in to stop them.

Felipe Calderon, member of the right-leaning PAN party, won Mexico’s presidential election on July 2, 2006 by a narrow majority, so narrow that a recount was conducted. López Obrador, member of the left-leaning PRD party, immediately started with accusations of irregularities in polling stations and demanded a national recount. Back and forth went the accusations until finally, after a targeted recount still showed Calderon the winner, on September 5, 2006 Calderón was unanimously declared President-elect by the Tribunal. The citizens of Mexico trust the Tribunal. They trust the Federal Electoral Institute.

So what does Obrador do? He certainly doesn’t admit defeat like a person with class would do, on the contrary, all of these rulings against him make his resolve stronger. He stages protests, he disrupts speeches, he tries to do everything he can to disrupt the transition of power. Lastly, and this is the one that might bring the most long term harm to Mexico’s Democracy, he has now staged a parallel government that will try to implement its own policies in defiance of Mexico’s long established government – all of this despite the fact that the majority of Mexican citizens have turned against him.

Why is it that lefties around the world, whether with Al Gore in 2000, Democrats in 2002 and 2004, or Obrador in Mexico – have a hard time accepting defeat? Contrast this to Republicans, who in the recent election lost both houses of congress in very close races. In fact, George Allen, the Republican Senator who lost in Virginia, was entitled to a recount under Virginia law but declined to do so, knowing that the recount would last until December, leaving the leadership of the senate in question. In fact, the only lasting contested race is one where a democrat contested her loss to a republican, again, following in the tradition of democrats before her.

So why this significant difference? Steven Den Beste, writing in the Chicago Boyz Blog, gives the best answer yet:

2000, Democrats: “We wuz robbed!”
2002, Democrats: “We wuz robbed again!”
2004, Democrats: “We wuz robbed yet again!”
2006, Republicans: “Bummer. Oh, well, we’ll do better next time.”

Note that right-wing pundits and bloggers don’t seem to be fixating on voter fraud, despite documented evidence that the Democrats have been doing that kind of thing? Note that Republican candidates who lost very narrowly gave in gracefully, without demanding recounts or resorting to the courts? Why the difference?

I think it’s the basic Democrat culture of entitlement showing through. Democrats were angry in 2000, 2002, and 2004 because they felt that they deserved to win. Republicans don’t feel that anyone deserves anything. They believe that all rewards have to be earned.

There’s another way of looking at this. In 2000, 2002, and 2004, Democrats explained their defeat by looking to see what the Republicans had done to inflict defeat on the Democrats. In 2006, the Republicans seem to be explaining their defeat by looking for all the ways they themselves loused up. The Democrats are showing their investment in the cult of the victim. They didn’t lose because of any fault or failure of their own; they lost because of the nefarious acts of villainous Republicans.

It’s another manifestation of their epistemological breakdown regarding the principle of cause-and-effect. The Democrats do not fundamentally believe that they are in control of their own fate — or ours. They were victims in 2000, 2002, and 2004. The only reason they weren’t victims in 2006 was that the nefarious Republicans didn’t successfully pull off their nefarious plots and plans this time. And in general Democrats demonstrate a broad belief that there’s no relationship between acts and results, cause and effect. What matters is motive, not behavior. If you do something with good intentions, the result will be good.

And never mind what road is paved with good intentions. They don’t believe in Hell, either.

The full post, with much more not quoted above, can be found here.

Update: France seems to exhibit the same phenomena, see here.

Update: Contrast President Bush vs President Clinton leaving office here.

Quote Of The Day

“But even if Pelosi delivers the particulars of what she has so far pledged, it’s not exactly a revolution she’s offering. The gifts, free meals and travel she proposes to ban are largely symbolic perks to lawmakers….And Pelosi’s promised transparency on earmarks is a step down from Democratic campaign vows to ban earmarks sponsored by a lawmaker if the spending benefits the member, his or her spouse, relatives or firms that employ any of them. What’s more, Pelosi has tapped Wisconsin’s David Obey, a 37-year veteran of the House who is the top Democratic appropriator, with drafting the actual earmark reforms, a troubling choice given that Obey was responsible for approximately 40% of the past earmarks under an informal system established by both parties, according to Scott Lilly, Obey’s former chief of staff”. — Massimo Calabresi, writing in Time magazine on the purported reform of pork barrel spending in the new Democratic Congress.

Charles Murray On Poverty Measurements

Charles Murray, in a somewhat dated paper, writes:

Here I summarize one of the main results of that inquiry, half hopeful and half disturbing. The hopeful half is that poverty in America is seldom the result of uncontrollable events involving the economic system. I will argue that the old wisdom—that anyone who is willing to work hard can make a decent living—has much more truth to it than has recently been acknowledged. The disturbing half is that our current popular understanding of the poverty population may be very wide of the reality. I conclude with a proposal for clarifying the situation.

The more general statement is that poverty among the working-aged in 1970 was a phenomenon among people with less than a high school education, who constituted a remarkable 75 percent of working- aged adults below the poverty line.[3] That most poor people are ill-educated does not mean that most ill-educated people are poor. On the contrary, 90 percent of them were not poor in 1970, 90 percent were not poor in 1980, and 84 percent were not poor in either year. But three out of four people who were poor came from that group.

Poverty is the elephant of social policy, with social scientists playing the role of the groping blind men. We each describe a different appendage without really contradicting one another. In this case, I have asked a specific question regarding people who are in the labor market and reached the conclusion … that it is extremely rare for a person to get into the labor market, stick with it, and remain poor…. Suppose, however, I had made just one different assumption, that people who are not in the labor market are discouraged workers, out of the labor market only because they know there are no jobs (or only “dead-end” jobs). Presto: The portrait can be made to flip completely, and the nation becomes once more a country with structural poverty woven inextricably throughout the economy.

The full paper can be found here. Link and quote via Division Of Labor here.

Quote Of The Day

“Galbraith was a very, very good writer, but he was not a very good economist. His economic history is entertaining, but it is not theoretically sound, and his major theories, captured in The New Industrial State, were almost comically wrong. The book was being proven incorrect by history virtually as he wrote it. His tirades against advertising, much beloved by current critics of consumer culture, were backed by no research or empirical data, and still aren’t. I love his books, and highly recommend them, but he was not a major economist. Milton Friedman, on the other hand, was as successful inside the academy as outside it. His Monetary History of the United States, and associated work, revolutionised monetary policy, removing it from the clutches of the Keynesians. You can thank Milton Friedman for the fact that our central banks no longer hand us double-digit inflation in a fruitless quest for permanently higher output levels. While his work has since been refined, and his push for quantity targeting has largely been abandonned, he remains central to modern monetary policy. His permanent income hypothesis has made similar contributions to consumption theory. His students have also expanded the boundaries of human knowlege in significant ways, particularly Gary Becker, another Nobel-prize winner…Anyone who would compare the Nobel prize-winner to JKG [John Kenneth Galbraith] as an economist can only have a gaping hole in their economic education”. —Megan McArdle, on the legacy of Milton Friedman

The Power Of Economics – Reducing AIDS In Africa

Esquire magazine on economist Emily Oster solution to reducing AIDS in Africa:

Now a Becker Fellow at the University of Chicago, Oster continues to blur academic boundaries with further work on AIDS and a volatile new interest: the reported wave of female infanticide in Asia.

When I began studying the HIV epidemic in Africa a few years ago, there were few other economists working on the topic and almost none on the specific issues that interested me. It’s not that the questions I wanted to answer weren’t being asked. They were. But they were being asked by anthropologists, sociologists, and public-health officials.

That’s an important distinction. These disciplines believe that cultural differences—differences in how entire groups of people think and act—account for broader social and regional trends. AIDS became a disaster in Africa, the thinking goes, because Africans didn’t know how to deal with it.

Economists like me don’t trust that argument. We assume everyone is fundamentally alike; we believe circumstances, not culture, drive people’s decisions, including decisions about sex and disease.

I’ve studied the epidemic from that perspective. I’m one of the few people who have done so. And I’ve learned that a lot of what we’ve been told about it is wrong. Below are three things the world needs to know about AIDS in Africa.

1. It’s the wrong disease to attack. Approximately 6 percent of adults in sub-Saharan Africa are infected with HIV; in the United States, the number is around 0.8 percent. Very often, this disparity is attribu ed to differences in sexual behavior—in the number of sexual partners, the types of sexual activities, and so on. But these differences cannot, in fact, be seen in the data on sexual behavior. So what actually accounts for the gulf in infection rates?

According to my research, the major difference lies in transmission rates of the virus. For a given unprotected sexual relationship with an HIV-infected person, Africans are between four and five times more likely than Americans to become infected with HIV themselves. This stark fact accounts for virtually all of the difference in population-wide HIV rates in the two regions.

There is more than one reason why HIV spreads more easily in Africa than America, but the most important one seems to be related to the prevalence of other sexually transmitted infections. Estimates suggest that around 11 percent of individuals in Africa have untreated bacterial sexually transmitted infections at any given time and close to half have the herpes virus. Because many of these infections cause open sores on the genitals, transmission of the HIV virus is much more efficient.

So what do we learn from this? First, the fact that Africa is so heavily affected by HIV has very little to do with differences in sexual behavior and very much to do with differences in circumstances. Second, and perhaps more important, there is potential for significant reductions in HIV transmission in Africa through the treatment of other sexually transmitted diseases.

Such an approach would cost around $3.50 per year per life saved. Treating AIDS itself costs around $300 per year.

Be sure to read her other points – the full article can be found here. Megan McArdle has more here.

Quote Of The Day

“An increase in the minimum wage has several distinctive negative effects on the economy. While the wages of some low skilled workers would improve, it would reduce employment opportunities for teenagers and other lower skilled workers. They are pushed either into unemployment or the underground economy. A bigger minimum also raises prices of fast foods and other goods produced with large inputs of unskilled labor….A rise in the minimum wage increases the demand for workers with greater skills because it reduces competition from low-skilled workers. This is an important reason why unions have always been strong supporters of high minimum wages because these reduce the competition faced by union members from the largely non-union workers who receive low wages”. —Gary Becker, Nobel Laureate in economics, in this weeks blog of the week titled, On Raising the Federal Minimum Wage

The New York Times On Milton Friedman

The New York Times has a good overview of just who Milton Friedman was and how important he was to world economics:

Milton Friedman, Free Markets Theorist, Dies at 94

Milton Friedman, the grandmaster of free-market economic theory in the postwar era and a prime force in the movement of nations toward less government and greater reliance on individual responsibility, died today in San Francisco, where he lived. He was 94.

His death was confirmed by Robert Fanger, a spokesman for the Milton and Rose D. Friedman Foundation in Indianapolis.

Conservative and liberal colleagues alike viewed Mr. Friedman, a Nobel prize laureate, as one of the 20th century’s leading economic scholars, on a par with giants like John Maynard Keynes and Paul Samuelson.

Flying the flag of economic conservatism, Mr. Friedman led the postwar challenge to the hallowed theories of Lord Keynes, the British economist who maintained that governments had a duty to help capitalistic economies through periods of recession and to prevent boom times from exploding into high inflation.

In Professor Friedman’s view, government had the opposite obligation: to keep its hands off the economy, to let the free market do its work. He was a spiritual heir to Adam Smith, the 18th-century founder of the science of economics and proponent of laissez-faire: that government governs best which governs least.

The only economic lever that Mr. Friedman would allow government to use was the one that controlled the supply of money — a monetarist view that had gone out of favor when he embraced it in the 1950s. He went on to record a signal achievement, predicting the unprecedented combination of rising unemployment and rising inflation that came to be called stagflation. His work earned him the Nobel Memorial Prize in Economic Science in 1976.

Rarely, his colleagues said, did anyone have such impact on both his own profession and on government. Though he never served officially in the halls of power, he was always around them, as an adviser and theorist.

“Among economic scholars, Milton Friedman had no peer,” Ben S. Bernanke, the Federal Reserve chairman, said today. “The direct and indirect influences of his thinking on contemporary monetary economics would be difficult to overstate.”

Professor Friedman also fueled the rise of the Chicago School of economics, a conservative group within the department of economics at the University of Chicago. He and his colleagues became a counterforce to their liberal peers at the Massachusetts Institute of Technology and Harvard, influencing close to a dozen American winners of the Nobel prize in economics.

It was not only Mr. Friedman’s antistatist and free-market views that held sway over his colleagues. There was also his willingness to create a place where independent thinkers could be encouraged to take unconventional stands as long as they were prepared to do battle to support them.

“Most economics departments are like country clubs,” said James J. Heckman, a Chicago faculty member and Nobel laureate who earned his doctorate at Princeton. “But at Chicago you are only as good as your last paper.”

Alan Greenspan, the former Federal Reserve chairman, said of Mr. Friedman in an interview on Tuesday. “From a longer-term point of view, it’s his academic achievements which will have lasting import. But I would not dismiss the profound impact he has already had on the American public’s view.”

To Mr. Greenspan, Mr. Friedman came along at an opportune time. The Keynesian consensus among economists, he said — one that had worked well from the 1930s — could not explain the stagflation of the 1970s.

But he also said that Mr. Friedman had made a broader political argument: that you have to have economic freedom to have political freedom.

Continue reading ‘The New York Times On Milton Friedman’

Quote Of The Day

“Language is the keystone to politics. This past week I gave some lectures about illegal immigration. I noticed how the supporters of open borders so often prefer to demonize their opponents as “anti-immigrant”, hoping to reframe the debate into Americans’ supposed animosity against individual arrivals, legal and illegal. And why not when a rational defense of illegal immigration is indefensible? “Undocumented worker” is another favorite. But with 25% of all illegal alien households on entitlements in California, it is hard to think that all aliens are working or simply forgot their documents at the border. “The borders crossed us” is yet another deliberate misnomer, when the vast majority of Mexicans and Mexican-American in the United States cannot trace their family lineage in America past three generations. You get the picture: when an argument is indefensible then language is contorted to do what reason cannot”. —Victor Davis Hanson

The Other Milton Friedman: A Conservative With a Social Welfare Program

Robert Frank, an economist at the Johnson School of Cornell University, writes in the New York Times:

The Other Milton Friedman: A Conservative With a Social Welfare Program

Published: November 23, 2006

Milton Friedman, who died last week at 94, was the patron saint of small-government conservatism. Conservatives who invoke his name in defense of Social Security privatization and other cutbacks in the social safety net might thus be surprised to learn that he was also the architect of the most successful social welfare program of all time.

Market forces can accomplish wonderful things, he realized, but they cannot ensure a distribution of income that enables all citizens to meet basic economic needs. His proposal, which he called the negative income tax, was to replace the multiplicity of existing welfare programs with a single cash transfer — say, $6,000 — to every citizen. A family of four with no market income would thus receive an annual payment from the I.R.S. of $24,000. For each dollar the family then earned, this payment would be reduced by some fraction — perhaps 50 percent. A family of four earning $12,000 a year, for example, would receive a net supplement of $18,000 (the initial $24,000 less the $6,000 tax on its earnings).

Mr. Friedman’s proposal was undoubtedly motivated in part by his concern for the welfare of the least fortunate. But he was above all a pragmatist, and he emphasized the superiority of the negative income tax over conventional welfare programs on purely practical grounds. If the main problem of the poor is that they have too little money, he reasoned, the simplest and cheapest solution is to give them some more. He saw no advantage in hiring armies of bureaucrats to dispense food stamps, energy stamps, day care stamps and rent subsidies.

As always, Mr. Friedman’s policy prescriptions were shaped by his desire to minimize adverse economic incentives, a feature that architects of earlier welfare programs had largely ignored. Those programs, each administered by a separate bureaucracy, typically reduced a family’s benefits by some fraction of each increment in earned income. Rates of 50 percent were common, so a family participating in four separate programs might see its total benefits fall by $2 for each extra dollar it earned. Under the circumstances, no formal training in economics was necessary to see that working didn’t pay. In contrast, someone who worked additional hours under Mr. Friedman’s plan would always take home additional after-tax income.

The negative income tax was never adopted in the end, because of concern that a payment large enough to support an urban family of four might induce many to go on the dole. With a payment of $6,000 per person, for example, rural communes of 30 would have a pooled annual payment of $180,000, which they could supplement by growing vegetables and raising animals. Because these groups could live quite comfortably at taxpayer expense, there would be an eager audience for accounts of their doings on the nightly news. Political support for such a program would be difficult to sustain.

Instead, Congress adopted the earned-income tax credit, essentially the same program except that only people who were employed received benefits. One of the few American welfare programs widely adopted in other countries, the earned-income tax credit has proved far more efficient than conventional programs, just as Mr. Friedman predicted. Yet because it covers only those who work, it cannot be the sole weapon in society’s antipoverty arsenal.

This month, economic populists like Jim Webb, Jon Tester and others were elected to Congress on pledges to strengthen the social safety net. In pursuing this task, they should take seriously Milton Friedman’s concern about incentives. How might they expand support for the unemployed without undermining work incentives?

One possibility is government-sponsored employment coupled with negative income tax payments that are too small to live on, even in large groups. Most low-income people would continue working for private employers, as they now do under the earned-income tax credit. For others, government would stand as an employer of last resort. With adequate supervision and training, even the unskilled can perform many useful tasks. They can plant seedlings on eroding hillsides, for example, or remove graffiti from public spaces. They can transport the elderly and handicapped. Coupled with low negative income tax payments, wages from public service or private employment could lift everyone from poverty. This combination would provide no incentive to go on the dole.

Mr. Friedman, of course, would not have welcomed an expansion of the federal bureaucracy. But as his own observations about the provision of government services made clear, guaranteeing employment at low wages would require no such expansion. By inviting companies to bid for program contracts, government could harness market forces to control costs.

In the face of huge budget deficits, is such a program affordable? In an article in 1943, “The Spendings Tax as a Wartime Fiscal Measure,” Mr. Friedman proposed a progressive consumption tax as the best source of revenue to meet critical national objectives. In addition to reporting their incomes to the I.R.S., people would also report their savings, as they do now for 401(k) plans. The difference between income and savings is annual consumption. That amount, less a standard deduction, would be taxed at progressive rates. High tax rates on consumption by the wealthy, Mr. Friedman argued, would generate additional revenue with only minimal sacrifice. So if providing greater economic security for low- and middle-income families is an important national objective, as many voters seem to feel, there are ways to pay the bill.

By all accounts, Mr. Friedman was a generous and compassionate man, someone more keenly aware of good luck’s contribution to individual prosperity than many of his disciples. Careful students of his work will be inspired not to dismantle the social safety net but to make it more effective.

Robert H. Frank, an economist at the Johnson School of Cornell University, is the co-author, with Ben S. Bernanke, of “Principles of Economics.”

The full article can be found here. Cal Thomas has more here.

Larry Summers On Milton Friedman

Larry Summers, former president of Harvard, and Treasury secretary in the Clinton administration, writes on Milton Friedman:

The Great Liberator

Published: November 19, 2006

Brookline, Mass.

IF John Maynard Keynes was the most influential economist of the first half of the 20th century, then Milton Friedman was the most influential economist of the second half.

Not so long ago, we were all Keynesians. (“I am a Keynesian,” Richard Nixon famously said in 1971.) Equally, any honest Democrat will admit that we are now all Friedmanites. Mr. Friedman, who died last week at 94, never held elected office but he has had more influence on economic policy as it is practiced around the world today than any other modern figure.

I grew up in a family of progressive economists, and Milton Friedman was a devil figure. But over time, as I studied economics myself and as the world evolved, I came to have grudging respect and then great admiration for him and for his ideas. No contemporary economist anywhere on the political spectrum combined Mr. Friedman’s commitment to clarity of thought and argument, to scientifically examining evidence and to identifying policies that will make societies function better.

Mr. Friedman is perhaps best known for his views on money and monetary policy. Fierce debates continue on how the Federal Reserve and other central banks should set monetary policy. But the debates take place within the context of nearly total agreement on some basics: Monetary policy can shape an economy more than budgetary policy can; extended high inflation will not lead to prosperity and can lead to lower living standards; policy makers cannot fine-tune their economies as they fluctuate.

These insights may seem self-evident — but they were won through a combination of Mr. Friedman’s powerful argument and painful experience. I know. As an undergraduate in the early 1970s, I was taught that everyone other than Milton Friedman and a few other dissidents knew that fiscal policy was of primary importance for stabilizing economies, that the Phillips curve could be exploited to increase employment if only society would tolerate some increase in inflation and that economists would soon be able to tame economic fluctuations through finely calibrated policies. When I started teaching undergraduates a decade later, Mr. Friedman’s heresies had become the orthodoxy.

While much of his academic work was directed at monetary policy, Mr. Friedman’s great popular contribution lay elsewhere: in convincing people of the importance of allowing free markets to operate.

From what I’ve heard, Milton Friedman’s participation on a government commission on the volunteer military in the late 1960s was a kind of intellectual version of the play “Twelve Angry Men.” Gradually, through force of persistent argument and marshaling of evidence, he brought his fellow commission members around to the previously unthinkable view that both our national security and our broader interest would be best served by a volunteer military.

Another example of Mr. Friedman’s influence is the structure of modern financial markets. Today we take it as given that free financial markets shape finance. The dollar fluctuates unhindered against other currencies and there is an entire industry of trading futures and options on interest rates and currencies. At the time Mr. Friedman first proposed flexible exchange rates and open financial markets, it was thought that they would be inherently destabilizing and that governments needed to control the movement of capital across international borders.

There are other areas like vouchers for school choice, drug legalization and the abolition of certification requirements for lawyers, doctors and other professionals where Mr. Friedman has not yet and may never carry the day. But even in these areas, the climate of opinion and the nature of policy have shifted because of his powerful arguments.

This all would be enough to mark Milton Friedman as a great man. But beyond Milton Friedman the economist, there was Milton Friedman the public philosopher. Ask reformers in any one of the countries behind what we used to call the Iron Curtain where they learned to contemplate alternatives to communism during the closed era before the Berlin Wall fell and they will often tell you about reading Milton Friedman and realizing how different their world could be.

Milton Friedman and I probably never voted the same way in any election. To my mind, his thinking gave too little weight to considerations of social justice and was far too cynical about the capacity of collective action to make people better off. I believe that some of the great challenges we face today, like rising inequality and global climate change, require that the free market be tempered instead of venerated. And like any economist, I have my list of areas where I believe Mr. Friedman oversimplified or was simply wrong.

Nonetheless, like many others I feel that I have lost a hero — a man whose success demonstrates that great ideas convincingly advanced can change the lives of people around the world.

Lawrence H. Summers, a university professor of economics at Harvard, was Treasury secretary in the Clinton administration.

The full article can be found here.

Giving Thanks

The Economist blog gives us all some advice:

TODAY is Thanksgiving in America, one of the few countries that has an entire holiday at least ostensibly devoted to, well, giving thanks….

If you want to live a happier life, start a gratitude journal and spend a few minutes every day writing down the many things you have to be grateful for. Almost no one is free from the delusion that most of the rest of the world has more to be happy about than they do; a gratitude journal can help focus the mind.

If you are an American, you can start with having had the astounding good fortune to be born in the richest society in the history of the world; you had a better than 95% chance of being born somewhere poorer, and probably much less free. Someone making less than the American poverty line of $9,973 is still richer than roughly 85% of the people in the world. That should enable you to have a very happy Thanksgiving indeed.

Happy Thanksgiving everyone!

Real Hourly Compensation Is Up ALOT

Real Hourly Wages

Dr. Mark J. Perry, professor of finance and economics at the University of Michigan-Flint in the School of Management sets the record straight on real hourly wages:

One issue is that compensation includes both wages AND benefits, and we should really look at TOTAL COMPENSATION over time, and not just monetary wages.

1. The data in the graph above are quarterly, and measure real (inflation-adjusted) hourly compensation (wages AND benefits). Click on graph to enlarge.

2. Using the percent change from the same quarter a year ago, real wages increased by 3.3% in the third quarter this year, 3.7% in the second quarter this year, and 2.6% in the first quarter of this year. In fact, we have had 45 consecutive quarterly increases in real compensation, and you have to go all the way back to the second quarter in 1995 for the last quarterly decrease in real hourly compensation.

3. The last time in U.S. history when there was a consectutive increase that long in real hourly compensation was from 1961-1973, when there were 51 staight quarters of increases in realy hourly compensation.

4. Over the last 10 years, there was a 25% increase in real hourly compensation for the first time for a 25% increase in real compensation during a 10-year period since the 1963-1973 period.

The full post can be found here.

Quote Of The Day

“A cultural factor that reduces the social tensions that might otherwise arise from a sharp and rising inequality of Americans’ incomes is that the United States, unlike the countries of Europe, has no aristocratic tradition. There is no suite of tastes, accent, bearing, etc., that distinguishes the rich in America from the nonrich. The rich have more and better goods, but they do not act as if they were a “superior” sort of person, refined, well bred, looking down on the average Joe. The rich play golf, but so does the middle class. The middle class follows sports, but so does the upper class”. —Richard Posner, writing on Why Rising Income Inequality in the United States Should Be a Nonissue

Lowering Capital Gains Taxes Helps The Poor

MIT economist Arnold Kling writes:

Here’s what the data show: cuts in capital gains tax rates tend to coincide with DECREASES in the poverty rate for the time periods for which data are available. For instance, Ronald Reagan cut the capital gains tax rate as part of his tax reform act of 1986.

Bill Clinton cut the capital gains tax rates on long-term gains in 1997 and a strong decrease in poverty rates resulted. George Bush cut the capital gains and dividends taxes in 2003 and the resulting economic surge caused a decrease in the 2004/2005 poverty rate. Although comparable data are not available for the first of the supply-side tax cuts which were proposed by John Kennedy, his rationale for those cuts was the alleviation of poverty, claiming that in economic affairs ‘a rising tide lifts all boats.’

Critics on the left charge that lowering the tax rate on capital helps the rich, not the poor. This reveals the fundamental presupposition error of their thinking—that the rich and poor have an inherent economic conflict of interest. They do not. The tendency in modern dynamic economies is for the rich and poor both to get richer, but at different rates. Growth-oriented policies are beneficial to both. They have an inherent harmony of interests. This is demonstrated by current economic data. Lowering the cost of taxes on capital lowers the risk of capital investment. The tax cuts of 2003 triggered a very strong surge in capital spending. This means more buildings, more computers, and more machines, which means more people to occupy, sit at and operate them. That’s why the household survey shows a gain of 8 million jobs in the past 3 years.

The tax code doesn’t determine whether wealthy people invest their wealth or not. The tax code simply helps determine where they will invest it. They can invest their gains either on information technology and heavy equipment, or they can invest them in a small army of tax accountants, trust attorneys and other advisers to whom they turn for help in sheltering their gains from the IRS. I should know, I used that small army. In the late 1980s I was a tax accountant for the world’s largest accounting firm. I had some very wealthy clients, but not one of them gave in and sold all that they had and gave it to the poor. Instead they gave big chunks of it to us in exchange for us finding ways to structure their affairs so as to avoid giving even bigger chunks to the IRS. The higher the capital gains tax rate, the more they needed us.

The simple economic fact in the end seems to be a moral fact as well. There is an ‘envy-tether’ which, when tightened in an attempt to punish the wealthy, ends up hurting the poor.

The full article can be found here.

Quote Of The Day

“Without subsidies, it would not pay for Americans to produce much cotton; with them, the US is the world’s largest cotton exporter. Some 25,000 rich American cotton farmers divide $3 to $4 billion in subsidies among themselves – with most of the money going to a small fraction of the recipients. The increased supply depresses cotton prices, hurting some 10 million farmers in sub-Saharan Africa alone”. —Joseph Stiglitz, writing on the US cotton industry

David Boaz On Milton Friedman

This time a much shorter tribute to a great economist:

The World Turner

Milton Friedman died at the age of 94. Over his long life, he had the satisfaction of seeing the world turn in his direction.

Friedman was born in New York in 1912, at the end of a long period of peace and prosperity. The first half of his life witnessed a series of catastrophes for peace and freedom – World War I, the Bolshevik coup d’etat in Russia, the rise of fascism and national socialism, World War II, communist domination of half the world. Happily, Friedman’s parents had left Eastern Europe, avoiding the cataclysms there.

But freedom was under challenge in their adopted home, as well. The federal income tax began in 1913. World War I ushered in government planning on an unprecedented scale. Then came Prohibition, the New Deal, Keynesian economics, and a widespread feeling that the federal government could solve any problem it set its mind to.

Then, after World War II, with the big-government mentality almost unchallenged in the United States, Milton Friedman began writing. He wrote first about technical economic issues and laid the groundwork for a shift in U.S. monetary policy that would come later. Then in 1962, amidst the enthusiasm for John F. Kennedy’s New Frontier, he published “Capitalism and Freedom,” a book that influenced a whole generation of younger people. He proposed such ideas as school vouchers to bring the benefits of competition to education, a flat-rate tax to make the income tax less burdensome, and floating exchange rates to improve international finance.

After that the brilliant academic economist became a public figure-probably the most important advocate of individual freedom in the United States for the next 40 years. He wrote a column for Newsweek, lectured around the world, and appeared on television, always arguing for the benefits of free markets and free societies. He was enlisted as an adviser to Republican presidents and candidates, yet rejected the label “conservative,” insisting that he is a liberal like Thomas Jefferson and John Stuart Mill, or a libertarian in modern terms.

His advice was also sought around the world. Most famously, in the 1970s he advised the military government of Chile – for which he received years of abusive criticism – and the communist government of China – which no one seemed to mind. Happily, both governments listened, and both have become “economic miracles.” Chile now has the most successful economy in Latin America, and China’s path along the “capitalist road” has made it more prosperous than anyone could have dreamed in 1976, the year that Mao Zedong died and Friedman won the Nobel Prize.

In 1980 Friedman broadened his audience further with the publication of a book, “Free to Choose,” and an accompanying PBS television series. Millions of people watched “Free to Choose” and came to understand how markets work. One viewer, a young actor named Arnold Schwarzenegger, said in 1994: “In Austria I noticed that people would worry about when they would get their pension. In America, they would worry if they were going to meet their potential. Friedman’s books explained to me how a dynamic capitalist system allows people to fulfill their dreams.”

That show appeared just after Margaret Thatcher became prime minister of Great Britain, and just before Ronald Reagan was elected president. Thatcher and Reagan represented a revolution that Milton Friedman had helped to create: a shift away from central planning and the welfare state and toward a renewed appreciation for entrepreneurship, free markets, and limited government. The collectivist ideas that had dominated the 20th century were being replaced by a more libertarian spirit.

And not just in England and the United States. The success of the free market in Chile influenced other Latin American countries to move away from their long tradition of interventionism and tentatively embrace markets. About a decade after Reagan’s election, the Soviet empire collapsed, and many of the new leaders in eastern and central Europe turned out to be readers of… Milton Friedman. Estonia quickly became one of the post-Soviet success stories. When its young Prime Minister Mart Laar visited Washington, he was asked where he got the idea for his market-based reforms. Laar replied, “We read Milton Friedman and F. A. Hayek.” Another successful reformer, Czech Prime Minister Vaclav Klaus, was described as a “Friedmanite with a staff of Hayekians.”

Friedman was the intellectual father of the all-volunteer army — in particular, he persuaded a young congressman, Donald Rumsfeld, to become a leader in the successful effort to end the draft — and has also been an outspoken opponent of the war on drugs, which violates individual rights and fosters crime and corruption.

Millions of people around the world who live in freedom give thanks for the life and accomplishments of the man who said, “My central theme in public advocacy has been the promotion of human freedom.”

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