In Search of Fairness

Barack Obama has been called the “smartest man with the highest IQ ever to be elected president” by presidential historian Michael Beschloss, he was referred to as “God”  by Newsweek Managing Editor Evan Thomas in 2009, and just recently Jamie Foxx asked his audience to give honor to “our Lord and Savior Barack Obama.”

Apart from the risks in not disclaiming such deific encomiums, the characterizations themselves don’t square with fact. An intelligent man, not to mention a god-like one, would yield to the laws of economics that have predicted human behavior since Eden; namely, that hard work, risk-taking, and determination produce outcomes that in a free society are not disturbed by government seizure. When keeping is permitted to happen without interference, all of society will benefit. Labor that produces a surplus – i.e. more than can be consumed by its owner – becomes capital in one form or another. Individuals do not keep their capital to themselves for it does them no good when hoarded. They invest it to create more capital alongside their labor, which creates jobs, community wellbeing, and economic growth for all of society. A virtuous cycle of making, keeping, and investing ensues that makes those who began to create capital early richer than those who created it late. Both are richer than those who create no capital, laboring for wages and consuming all that their wages permit.

There is no perfidy in this process. Capital is produced by willingness and ability. Willingness is the propensity to save and set aside rather than consume. This usually reflects emotional maturity. Ability is the disposition to work, make constructive decisions, take measured risks, persist, and to learn from one’s experience – all of which is leveraged by preparation, either formally via education or experientially via the “school of hard knocks.”

Either willingness or ability or both explain why individuals reside at the top, middle, or the bottom of economic society. A person who over-consumes his means is destined to reside at the bottom. With rare exception, that behavior is always under the control of the individual. A failure to prepare, work diligently, decide well, understand when risks become gambles, persist through setbacks, and learn the lessons of experience will destine a person to live below her potential regardless of the starting point in life. None of these attributes of ability can be fobbed off on fate or happenstance.

The Left in all of its manifestations cannot accept this explanation. Life’s casualties have to be due to a villainous “other” or the dice of cause and circumstance. The individual is never responsible and must be a lifelong ward of the state. All of our social legislation is rooted in this mindset.

Sir Dudley North, an economic predecessor of Adam Smith, recognized the behavior of achievement more than three centuries ago. Writing in his 1691 Discourses upon Trade, North observed that:

The main spur to Trade, or rather to Industry and Ingenuity, is the exorbitant Appetites of Men, which they will take pains to gratifie, and so be disposed to work, when nothing else will incline them to it; for did Men content themselves with bare Necessaries, we should have a poor World.‎

A poor world indeed.

We are now wallowing in the fifth year of an economic morass made worse by government incompetence. Poverty rates are the highest in a generation. Over 46 million people are in the Supplemental Nutrition Assistance Program, the successor to the food stamp program, a number which has considerably exceeded the number of jobs created. The Great Food Stamp Handout was exacerbated by Obama’s expansion of its coverage to income levels which shouldn’t need food assistance but took it when offered. After-tax incomes have fallen since Obama assumed office even though the economy since 2009 has been technically growing. Why has this happened? Because the economy has been prevented by the policies of this administration from providing opportunity as an alternative to welfare. Because policy-making ineptitude prevented 23 million jobs from being created. Because over $2 trillion in capital coupled with immeasurable entrepreneurial talent is sitting leashed rather than unfettered on the sidelines, intimidated by the uncertainties of Obama’s economic policy de jour.

Notwithstanding North’s correct recognition that the pursuit of self-interest invariably benefits all of society, Obama favors taxes rather than individual initiative to promote economic growth – despite the fact high tax rates have historically proven to be contra growth – and he imposes on society his view of fairness, which disturbingly mirrors that of Karl Marx: "Jeder nach seinen Fähigkeiten, jedem nach seinen Bedürfnissen!" – “from each according to his abilities, to each according to his needs.”

Obama sees society as composed of “haves” and “have nots” which he must correct because its existence is rooted in unfairness, if not wrongdoing. This view is the common thread running through all three of his books … a belief that life is fundamentally a zero sum affair, and thus what one gets another must have lost. His ideological preoccupation, therefore, is with redistributing wealth rather than creating more of it – a zero sum, fixed pie perspective.

Unsurprisingly, when candidate Obama was asked by ABC news reporter Charles Gibson why he advocated increasing the capital gains tax rate when there exists a substantial body of evidence that it causes the government to suffer less rather than more revenue, Obama thought for a moment and then replied, “Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness." Fairness? In other words, notwithstanding the impotence of increased taxes in raising government receipts, Obama wants them increased anyway? Since his rationale is obviously not economic, what could it be? To penalize “excessive” success and redistribute its rewards in the name of fairness?

Once elected, Obama exploded the national debt with year after year deficit spending. Trillions were wasted on flawed programs for which society received no benefit. Obama’s reelection now assures that the national debt will rise to $20 trillion – up from the $10 trillion he inherited. Tax-paying Americans must pay down this debt, which means diverting money out of the private sector, where it would produce the benefits Sir Dudley North understood, and into the public sector where it will produce no social good. Having now run up the nation’s credit card debt, and imperiled our national security in the process, Obama whines that the rich are not paying their fair share of taxes.

What does it mean to be fair?

In civil society creative people are not permitted to pursue their ambitions by using their abilities to exploit others because that would be unfair. OK. Should they be penalized by a government that disproportionately expropriates the fruits of their abilities simply because they produce more value for themselves than others produce for themselves? Only in America would a Steve Jobs be able to live a freaky lifestyle that led to the creation of Apple, making him rich beyond measure and made others rich within measure. The world is better off because of Apple but it is also more unequal – benefiting Jobs in billions, others in millions, and still others relatively little. Is that fair? Is it fair for an allegedly all-knowing and benevolent government to seize some portion of Jobs’ fairly-gained assets because he had them to spare? Obama believes so.

No one got poor as a consequence of Jobs getting rich. No poor person would become better off if Jobs had lost everything. What rationale, then, justifies taking one cent of his wealth under law if no one was injured in its creation? Doesn’t this imply that the people, or the government that allegedly represents them, own the franchise for wealth creation and are thereby justified in taking a share of all wealth created? This seems to be Obama’s belief when he declared this past August that no entrepreneur could take credit for the business he built.

Is the goal of fairness to make the “haves” and “have nots” economically equal or at least to reduce the economic disparity between them? I have previously blogged on why the rich are rich and why they are likely to remain so. This seems to be the heart of the “fairness” issue with Obama. Earlier this year he gave a speech in which he said:

Can we succeed in a nation where a shrinking number of people do exceedingly well, while a growing number struggle to get by? Or are we better off when everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same rules?

This is classic Obama straw man-speak. The situation described in his statement doesn’t exist. Those who do well are not a shrinking number – certainly not in a prosperous economy, which his policies have prevented for the past 36 months. Moreover, the populist question, “Are we better off when everyone gets a fair shot,” implies everyone doesn’t get a fair shot. That’s intentionally misleading and false. The American economy isn’t a country club which excludes non-members. Who would have bet that an adopted lower middle class kid in San Francisco with serious psychological maladjustments raised by a struggling high school-educated blue collar family would grow up to create an entire industry and become a billionaire?

Less than one in five “rich” people inherits wealth. The rest create businesses as Jobs did which produce products and services that we want and were willing to pay lavishly to own. Who among those reading this blog is not better off than his parents were at the same age?

The idea that there is a permanent underclass, or a permanent “any class” as Obama would have us believe ignores income mobility. Suppose there are three houses side by side and their addresses are 1, 2, and 3 from left to right. Multiple families live in each house. The house in which each family lives is determined by their income. Let’s say that all families in 1 may not earn over $10,000 as a condition of living there. Likewise, those in 2 can’t earn over $20,000, but since the cap to live in 1 is $10,000, they can earn as little as $10,001. House 3 is a little strange. To live there, a family must earn $20,001 but there’s no upper limit because there’s no other house to move up to as incomes grow.

Let’s designate these houses as Lower Income, Middle Income, and Upper Income (Obama would call Upper Income “the rich”)

Over the course of years, the families in these houses receive raises and promotions increasing their income. When a family in Lower Income exceeds the income limit to live there, they must move out, most moving into Middle Income. What happens to the total income in the Lower Income house? It declines. In contrast, the total income of Middle Income increases – unless some of its members have had raises and promotions that exceed the Middle Income cap, in which case they have to move into Upper Income. Since there is no house to move to as raises, promotions, and good fortune increase their income, the residents of Upper Income – unlike Lower and Middle Income – remain as more and more people move in over time.

What happens to the total income as more people move into Upper Income? Well it increases, of course, because there’s no place to go except down, which occasionally happens with retirement, reduced income, and bad luck. But for long periods growing incomes move families into Upper Income raising its total income. The same thing happens in Middle Income, which is gaining families from Lower Income and losing families to Upper Income, Even if Middle Income had the same number of families as Upper Income, their collective income would be less because of the upper income limit to live there.

In the course of time, Lower Income is losing families to Middle Income (and occasionally Upper Income) and its collective income is falling. But it won’t fall to zero because people are entering the workforce by virtue of age or immigration and most will start in Lower Income

We would look at the dynamic economy represented by these three houses collectively and conclude that it’s doing well because families are prospering and moving up. Over time the total income of Upper Income becomes the largest percentage of the three-house economy because there’s no way out of it except down. And unlike the other two houses, there’s no income cap for living there so in Upper Income you would find managers and executives, lawyers and doctors, and small business owners, but you’d also find rock stars and professional athletes, and superstar CEOs like Bill Gates, Warren Buffett, and Jeff Bezos since there is no other place for them to live.

Middle Income earns the next largest percentage of the incomes in this economy, but not as much as Upper Income. The upper end of Middle Income is capped and it doesn’t have rock stars, athletes, and super CEOs living there. Lower Income has the smallest share of total income because the income per family is less and people move out as they prosper to be replaced by low-paid entry level workers, immigrants, and part-timers. In the course of time most will move up.

While we mere mortal earthlings look at the three-house economy and conclude things are going swimmingly, the divinely intelligent Obama concludes it’s a disaster. The rich are getting richer and the poor are getting poorer in terms of the percentage of total income each house represents. Something must be done. He immediately calls for new taxes on Upper Income to redistribute to Lower Income. Transfer payments might move a few out of Lower Income, but not many. Moreover, if they move out of Low Income via transfer payments rather than effort, is that good for society? Would you help your children that way?

In fact, if Obama devoted his populist energy to growing the economy (maybe by permanently playing golf or vacationing in Hawaii – whatever keeps him out of the White House), the well-being of the families in each house would improve even if their share of the economy remained the same. A Rasmussen poll this week showed voters want economic growth over fairness by a 54% to 37% margin, quite possibly realizing that a rising tide lifts all ships. That’s hard to understand when a person has a fixed pie, zero sum view of economic distribution. As in this fictitious economy, Upper Income’s percentage of wealth in the real world is growing and Lower Income’s is shrinking and Obama thinks that’s not fair – regardless of its explanation. A more equal distribution would be better, he believes – a fool’s errand that was tried by Lyndon Johnson and is bankrupting the country. Ironically the more “equal’ income classes become, the more it short-circuits the highly progressive tax system we have in this country.

No egalitarian society has ever prospered – except in terms of political egalitarianism, which originated in the post-war Colonies of America. Communism failed in its scant 70-year Soviet experiment. Its citizens became neither more rich nor more equal. The early 19^th century Utopian experiments of Robert Owen and others of his ilk all failed because it is not in the nature of man to work hard for the benefit of the community. The Pilgrims learned this in their first year’s flirtation with socialism. Starvation taught them that private enterprise “made all hands very industrious …” Even as Obama is gutting the Clinton welfare-to-work program, the economies of France, Italy, Greece, and Portugal are collapsing as the Pilgrim experiment predicted, showing in sharper contrast what happens when government confiscatory welfare enables more than a relative few non-workers to live off of the industry of others.

An intelligent, divinely Olympian president would accept the argument presented in this blog as Exhibit A against raising taxes. An intelligent president, especially a God-like one, would delay the current fiscal cliff confrontation until a new Congress was seated and had two years to work on comprehensive tax and entitlement reform before it had to deal with a partisan, agenda-driven electorate again. An intelligent leader would push Congress to work together to create a fiscal and regulatory climate that would allow the private sector to flourish as it did in the Reagan and Clinton years.

Instead, we have Obama.