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Crony Inequality

from Don Boudreaux at Cafe Hayek A Quick Note On Inequality and Cronyism:

Cronyism of the sort that Sam rightly and consistently decries does indeed unjustly enrich some people by making other people poorer.  So such income transfers (which, as Sam suggests, government pulls off with far greater success than it has when it tries to transfer wealth from the rich to the poor) are not only rooted in force (and, hence, are presumptively unjust) but are also zero- or negative-sum ‘moves.’  In both of these ways such transfers differ from the voluntary and peaceful processes that create income and wealth differences in private markets.

But even with such rent-seeking, cronyist transfers, I’d not say that the concern is, or should be, with any resulting increase in income inequality.  The concern is, or ought to be, with the unjust policies and activities that give rise to these transfers.  If a millionaire embarks upon a life of successful house burglarizing, the problem with this activity isn’t that it further increases income inequality; the problem is that the activity itself is immoral and destructive.  So just as we wouldn’t look with less disfavor upon a burglar whose success decreases income inequality than we look upon this hypothetical millionaire burglar whose success increases income inequality, our assessment of crony capitalism isn’t made any more harsh because it increases income inequality.

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Self Interest vs Selfishness

from Selfishness, Greed, and Capitalism by Christopher Snowden

Like Chang, many critics of capitalism use ‘self- interest’ and ‘selfishness’ (or ‘greed’) interchangeably, but they are quite different. Selfishness implies indulging oneself at another’s expense, but free- market transactions only take place when two self- interested parties see a mutual benefit.

Self- interest should not be conflated with avarice. If I decide to have apple juice instead of orange juice with my breakfast I am acting in my self- interest, but unless I snatch it from a thirsty child I can hardly be accused of selfishness.

Many argue that self- interest should not be seen in purely economic terms, but, instead, as a broader term to describe our goals and aspirations. Milton and Rose Friedman, for example, wrote (Friedman and Friedman 1980: 27):

Narrow preoccupation with the economic market has led to a narrow interpretation of self- interest as myopic selfishness, as exclusive concern with immediate material rewards. Economics has been berated for allegedly drawing far- reaching conclusions from a wholly unrealistic ‘economic man’ who is little more than a calculating machine, responding only to monetary stimuli. That is a great mistake. Self- interest is not myopic selfishness. It is whatever it is that interests the participants, whatever they value, whatever goals they pursue. The scientist seeking to advance the frontiers of his discipline, the missionary seeking to convert infidels to the true faith, the philanthropist seeking to bring comfort to the needy – all are pursuing their interests, as they see them, as they judge them by their own values.

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A Portion of Keynes

 Economist John Maynard Keynes

I have often wondered if Keynes would recognize the policies that are often carried out in his name.  Art Laffer and Kenneth Peterson addressed this question in The Investor’s Business Daily  in Obama Tax Hikes, Aimless Spending Ignore Keynes:

The higher taxes, heavy regulation, aimless government spending and huge ideological pet projects undertaken by this administration during the depth of a recession were all peddled to the American public as textbook Keynesian economic stimulus.

All, however, predictably nurtured atrophy, and seldom in the history of economic policymaking has so much harm been done to so many by so few. Words written in Keynes’ own hand, moreover, imply he would have rejected such blunders.

On Dec. 16, 1933, Keynes sent Franklin Roosevelt a letter outlining the content of his forthcoming op-ed in the New York Times. If FDR wanted prosperity to return to America’s shores, Keynes warned, the president must cease harming the supply side of the economy.

Government stimulus spending must be wisely chosen, he counseled. “There are many obstacles to be patiently overcome, if waste, inefficiency and corruption are to be avoided. There are many factors which I need not stop to enumerate, which render especially difficult in the United States the rapid improvisation of a vast programme of public works.”

Taxes must not be hiked, Keynes also stressed. “I lay overwhelming emphasis on the increase of national purchasing power resulted from governmental expenditure which is financed by Loans and not by taxing present incomes.”

And reform and recovery policies, he added, must be employed separately, not simultaneously: “On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action . . .”

Keynes stressed in his letter to Roosevelt that not all government spending is created equal and that the president should get “behind a campaign for accelerating capital expenditures, as wisely chosen as the pressure of circumstances permits.”

To finance the landscaping commenced in the name of economic recovery, Obama raised the top marginal tax rate on personal income to 39.6% from 35% and the tax rate on capital gains and dividend income to 23.8% from 15%.

The president resolved to put ideology ahead of science and cold-shouldered findings published by Romer, then chair of his Council of Economic Advisers. In her magnum opus on tax policy, she concluded that higher taxes would be deleterious to economic growth and recovery. Unsurprisingly, economic growth stalled.

President Hoover tried a similar recovery policy in 1932, when he hiked the top marginal tax rate on personal income to 63% from 25% but succeeded only in drilling the already-feeble economy into the ground.

Lord Keynes was a fervent proponent of fighting recessions with carefully planned government spending. Yet he was adamant that taxes must not be raised to finance government “stimulus” spending.

In Keynes’ view, mixing recovery policies and vast ideological pet projects was poisonous to economic recovery, and he did not mince words when schooling President Roosevelt on this point:

“We wonder whether the order of different urgencies is rightly understood, whether there is confusion of aim, and whether some of the advice you get is not crack-brained and queer.

“On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action . . . And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once.”

In 1946, shortly before his death, Keynes voiced concern about what some of his disciples were making of his theories, revealing his trepidations to his friend and intellectual nemesis, Friedrich von Hayek. In 1952, Hayek recalled their last conversation, in which he asked Keynes if he was alarmed by the policies being promoted by some of his followers. Quoting Hayek:

“After a not very complimentary remark about the persons concerned, he proceeded to reassure me by explaining that those ideas had been badly needed at the time he had launched them. He continued by indicating that I need not be alarmed; if they should ever become dangerous I could rely on him again quickly to swing around public opinion — and he indicated by a quick movement of his hand how rapidly that would be done.”

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I have excerpted a much larger portion of this article than I usually do but this is a significant piece of economic history and I am grateful for Peterson and Laffer for sharing it. Please link and read the entire article.

A theorist can not always be held responsible for the use of his work by others.  Just as a part of the truth can be more misleading than all of a lie, using only part of theory can be more destructive than executing the opposite of its prescription.


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A Low Information President

From The Washington Times, Lewis Uhler and Peter Ferrara write The rich pay more than their fair share.


The latest CBO report shows that the top 20% of income earners pay 70% of all federal taxes, while earning just over 50% of before tax income. The top 1% pay 24% of all federal taxes, while earning only 14.6% of before tax income.

By contrast, CBO reports that households in the middle 20%, the real middle class, pay 8.9% of all federal taxes, while earning 14.1% of before tax income. Households in the bottom 20% pay 0.6% of all federal income taxes, while receiving 5.3% of before tax income.

If we look just at federal income taxes, where the policy debate is, the disparity is even worse. The bottom 20% of households pay an income tax rate of -7.5%, CBO reports. The next lowest 20% pays an income tax rate of -1.3%. That means that instead of paying the IRS, like the rest of us, the bottom 40% are paid by the IRS.

The middle 20%, again the real middle class, pays an average income tax rate of just 2.4%, while earning 14% of before-tax income. Obama has been telling them for years the deck is stacked against them. Apparently, he has been pitching to low information voters who don’t know anything about IRS or CBO data. Or maybe we got a low information President.

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Inequality in Progressive Cities

from 15 Statistics That Destroy Liberal Narratives by John Hawkins in Townhall:

The more progressive the city, the worse a place it is to be poor and/or black. The most pronounced economic inequality in the United States is not in some Republican redoubt in Texas but in San Francisco, an extraordinarily expensive city in which half of all black households make do with less than $25,000 a year. Blacks in San Francisco are arrested on drug felonies at ten times their share of the general population. At 6 percent of the population, they represent 40 percent of those arrested for homicides. Whether you believe that that is the result of a racially biased criminal-justice system or the result of higher crime incidence related to socioeconomic conditions within black communities (or some combination of those factors) what is undeniable is that results for black Americans are far worse in our most progressive, Democrat-dominated cities than they are elsewhere. The progressives have had the run of things for a generation in these cities, and the results are precisely what you see. – Kevin Williamson