Sympathetic media outlets have repeatedly asserted that Democratic presidential nominee Joe Biden’s tax agenda would only hurt the wealthy. But a new study shows that Biden’s tax and regulatory agenda could seriously hurt the economy overall.
Four economists from Stanford University’s Hoover Institution analyzed Biden’s proposals to increase taxes, reinstate and expand a host of regulations, and create new subsidies for healthcare and renewable energy. The study concludes that these interventions would distort labor incentives, decrease productivity, and kill jobs.
As a result, the experts project that the policy agenda would, by 2030, lead to 4.9 million fewer jobs and the economy shrinking by $2.6 trillion. So, too, the study projects that consumption would be $1.5 trillion lower in 2030 and families would see a $6,500 drop in median household income compared to a neutral scenario.
“The risk from Joe Biden’s policies isn’t that they will send the economy reeling right away,” the Wall Street Journal editorial board concluded in its analysis of the study. “The problem is that they will have a long-term corrosive impact by raising the cost of capital, reducing the incentive to work and invest, and reducing productivity across the economy. Americans will pay the price in a lower standard of living than they otherwise would—and that they deserve.”
It’s crucial to understand not just what Biden’s government-heavy agenda would do to the economy, but why.
Tax hikes hurt the economy because they reduce incentives to work and produce.
“Taxing profits is tantamount to taxing success,” famed free-market economist Ludwig Von Mises once wrote. “Progressive taxation of income and profits means that precisely those parts of the income which people would have saved and invested are taxed away.”
Biden has promised to raise the corporate tax to 28 percent. Higher corporate taxes means less money available for investment, expansion, and new hiring—“taxing success,” as Mises wisely dubbed it. This means fewer jobs and lower wages for workers, as well as fewer offerings (especially of innovative new products) and lower quality for consumers.
This is why, while corporate tax hikes might sound like something that would just hurt “Big Business,” in reality, the costs would be passed on to consumers and workers. According to the Tax Foundation, “studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.”
Considering this, it should come as little surprise to see economists projecting negative economic consequences as a result of Biden’s hefty tax hikes.
As far as heavy-handed regulations are concerned, they create a drag on the economy by imposing additional costs and stifling innovation. The more red tape and hoops companies and entrepreneurs have to jump through and comply with, the less likely they are to discover new ideas and make breakthroughs. So, too, the more regulated an industry, the harder it is for start-ups to take on the big established companies that can better weather the costs of regulation.
Reducing competition means reduced innovation and more complacency.
Yet the real takeaway from this Stanford study is not about any one candidate, policy, or party. It’s another reminder that free markets and economic liberty drive prosperity—but heavy-handed government interventions hurt more than they help.
The [American] Dream is not dead, and we shouldn’t let a populist scream convince us otherwise. Americans living today have every reason to be optimistic—and grateful.
– Michael Strain, American economist
Capitalism has become the preferred whipping boy of those calling for more government involvement in markets. The statists love to begrudge it and the wealthy wokes love to downplay it. Whether it’s income inequality or the growing power of big tech, “late capitalism” is a term employed by those who would like to eliminate or greatly reduce private ownership and usher in an era of redistribution.
But is capitalism really in its final gasps? And if so, where are we headed?
The notion of late capitalism has been around since Karl Marx began his assault on free enterprise in the 19th century, although the term was officially coined by German economist Werner Sombart in his 1902 book Der Moderne Kapitalismus. Marx believed that the proletariat would eventually revolt against the bourgeoisie due to the angst created by inequality and exploitation. For him, one of the most egregious injustices was wealth inequality. He believed private property was a major driver of inequality, effectively insulating the wealthy from giving workers their fair share.
Sound familiar? Senator Sanders has an entire policy trove of bad ideas built on the premise that wealthy Americans have exploited workers by weaponizing their possessions (property) for their own malignant greed.
Those suggesting capitalism is in its final throes assume two things:
Economic inequality equals injustice
The existence of economic inequality means that capitalism must be replaced
A Tale of Two Inequalities
Unemployment in the United States is currently at the lowest level it has been since the 1960s. Not only is the economy creating more jobs, but wages are growing. And consider this: “wages for the bottom third of workers have risen at a 4.1 percent annual pace over the past two years versus 3.3 percent for the middle third and 3.6 percent for those at the top.”
Workers are in such demand, especially in industries like healthcare and education, that an increasing number of companies are offering incentive packages to defray the cost of moving to a new job. When we consider the income mobility of Americans, with 95 percent of those at the bottom 20 percent not being there in 15 years, it becomes clear that wealth is transient in a market economy, providing a pathway for many to pursue the American Dream.
It’s important to note that regulatory and tax reform play a role in reducing wealth inequality. To be sure, nothing will create absolute wealth parity in a free market (nor should it), but the effects of deregulation and tax reform are instructive. Economist Michael Strain notes that from the start of the Great Recession until 2016, “inequality decreased by 7 percent” after accounting for taxes and transfers.
As the government’s demands on business and personal wealth are reduced, employers feel more comfortable investing in expansion, leading to more jobs that in turn create a demand for additional labor. This makes workers more attractive to prospective employers, bolstering job seekers with a competitive environment that enables them to be choosier employees.
Despite the free-market’s ability to create a more level playing field, however, some types of inequality will continue to exist. Economist Thomas Sowell notes that there are many contributors to inequality, saying, “there was never a reason to expect equality. [There are so] many different complicating factors, cultures matter, demographics matter, regions matter.”
For example, the average life expectancy of a man that lives in the mountains is a decade less than one that lives in the Virginia suburbs. Inequality is even evidenced in seemingly superficial matters, such as physical attractiveness, athletic aptitude, and musical ability. Not everyone can play like Patrick Mahomes or sing like Adele.
The Justice of Capitalism
There are few things more professionally distressing than seeing your hard work and earnest efforts thwarted by a system designed to quash competition. Unfortunately, this is the type of approach many protectionists on both the left and right take when it comes to economic policy. Through onerous regulation, occupational licensing restrictions, minimum wage laws, price controls, tariffs, and more, it can feel like the deck is stacked against you.
By contrast, free enterprise is liberating and creates opportunity. The spread of capitalism and the promotion of free markets has led to a substantial decline in extreme poverty. In the 1980s, approximately 40 percent of the world’s population lived in extreme poverty. Today, that figure is 8.6 percent.
Even authoritarian regimes, like China, recognize the importance of limiting government intrusion in markets if they hope to be competitive in an increasingly globalized economy.
Capitalism has proven to be the best vehicle for economic justice for the marginalized and impoverished. Why would anyone want to deprive the poor of the mobility free enterprise affords?
If we look to public trust as an indication of capitalism’s viability, look no further than business, which holds “a massive 54-point edge over government as an institution that is good at what it does,” according to the Edelman Trust Barometer. It’s also worth noting that US economic confidence is the highest it has been in nearly 20 years.
No, capitalism doesn’t appear to be going anywhere anytime soon. Instead of statists thumbing their noses at capitalism–oftentimes suggesting governments intervene–they’d be wise to exhibit a little intellectual humility and take a lesson from the efficiency and dynamism of the private sector.
The data is indisputable. Capitalism has been the primary driver of economic flourishing and innovation for nearly three hundred years, catapulting individuals, societies, and nations into levels of prosperity that were previously unfathomable. Capitalism respects the agency of people and communities, recognizing that they should be able to freely associate and trade as they see fit. Free market capitalism honors the natural right to private property.
But, even beyond these principles and big ideas, the practical matter is that so long as humans value prosperity, opportunity and innovation, capitalism won’t fade away. Free enterprise offers technological innovation that make products smarter, lighter, cheaper, and use less material.
Moving from free market capitalism toward a command economy is neither moral nor responsible. So long as free people choose action over apathy and liberty over serfdom, capitalism will continue to offer individuals the opportunity to pursue the American Dream.
Doug McCullough is a corporate attorney at the Texas law firm, McCullough Sudan, and is a director of the Lone Star Policy Institute. Doug is a co-host of The Urbane Cowboys, a podcast on policy, society, and innovation. He is a National Review Institute Regional Fellow and Better Cities Project Fellow. He is a regular contributor to Foundation for Economic Education, and has been published in Entrepreneur, The Hill, Washington Examiner, Arc Digital, Houston Chronicle, and San Antonio Express.
This article was originally published on FEE.org. Read the original article.
What better way to get in the Halloween spirit than a spine-chilling binge of the viral Two Sentence Horror Stories on Netflix? If you still don’t get your fill, you can head over to Reddit for more “bite-sized scares.”
Two of the most outspoken critics of economic inequality look like they’ve been working up their own scary #TwoSentenceHorrorStories leading up to Halloween:
Power, money, influence—inequality is a frightening concern for many people. The way it is debated these days is even scarier than Demi Lovato’s infamous zombie outfit. Our former president called inequality “the defining challenge of our time,” while partisan politicians paint one side as a bunch of heartless monsters and the other side as brainless as the living dead.
To help us all have a more informed (and civilized) conversation about this important issue, here are five facts about inequality you might not know.
1. Historically, the Wealthy Got Rich by Exploiting the Poor, but …
For most of human history, there was a single story of how the rich got rich. The ruling political class extracted great sums of wealth from everyone else. Kings and emperors topping the list of the 10 richest men of all time reported by the BBC earlier this year include Mansa Musa I, Genghis Khan, Emperor Akbar I, and William the Conqueror.
Only recently, through the expansion of market economies in the late 19th and 20th centuries, have entrepreneurs and business tycoons cracked the list of the world’s wealthiest.
There is something quite different about the fortunes amassed by plunder and those generated by providing the world with Amazon, Microsoft, and Facebook.
Entrepreneurs can generate enormous wealth by making people in society better off. There’s nothing wrong with that. Unfortunately, like the old days, we also see the politically connected working with government agencies to rig profits.
When thinking about economic inequality in our modern world, we should be careful to differentiate between the economic means and the political means of obtaining wealth.
This differentiation also helps illuminate the real worries people have about inequality, which brings us to my next observation.
2. Concerns about Economic Inequality Are Usually Concerns about Power
I’ve been reading everything from Teen Vogue to the Economic Policy Institute to understand what people are saying about economic inequality. The challenges are nuanced, but the primary concerns young people have are crystal clear—it’s all about power.
Those attacking inequality emphasize the fear that wealth means the power to control. It’s as if the rich are a species of vampire who prey on the weak and feed on the blood of their victims. Once charmed, the victim will obey the vampire master’s command for eternity.
There is truth to the age-old story of plunder by the ruling class, and everyone agrees that power corrupts. So, even if we differentiate between the economic means and the political means of acquiring wealth, shouldn’t we be worried that the wealthy possess too much power?
In their study of markets and corruption, Georgetown University’s Jason Brennan and Peter Jaworski concluded:
[P]olitics corrupts markets. The more politicized an economy becomes, the more private actors try to rig regulations and the law to cheat consumers and competitors. Instead of trying to keep the nasty market away from pristine politics, we should be trying to keep nasty politics away from the market.
Reaching a similar conclusion, the 2018 Economic Freedom of the World report suggests an
…intrinsic link between economic freedom and other measures of human well-being—such as infant mortality, equality, happiness, and extreme poverty rates.
Additional studies of the 50 states discovered that limiting the size of government, the level of taxation, and the level of labor market regulation decreases inequality and increases incomes of the poorest 20 percent at the state level.
Your concern that some people have too much power is justified, but this is a problem with politics, not wealth. High levels of government control over the economy tend to breed corruption and structural inequality. Open markets of dynamic cooperation tend to decrease inequality and increase wealth for the most disadvantaged.
3. People Debating Inequality Are Biased, Too
Any good politician knows perception matters more than reality. Facts don’t win emotional arguments. You can actually drive a person further away by offering corrective information that challenges a wrong view or seems to dismiss their own personal experience.
When someone contradicts our views in a debate about a sensitive topic like inequality, our bodies respond in much the same was as being physically attacked. Like being chased by a chainsaw-wielding monster in a haunted house, our natural response is fight or flight.
Haidt’s lesson is one of humility. We are all much less rational than we think. Our emotional intuitions come first, and then we engage in “motivated reasoning” to justify what we want to believe.
In evolutionary terms, reasoning was designed to help us win arguments, not pursue the truth.
Moreover, we should be aware that all human beings suffer from cognitive bias. That’s a fancy way of saying our brains deviate from rational judgment in identifiable patterns. When it comes to the facts of inequality in their society, it is not just that people are wrong; people hold systematically biased beliefs.
So, instead of treating important issues as political battles, let’s turn a contentious debate into a conversation where well-meaning (and oftentimes mistaken) people who disagree about fundamental issues can learn from one another. To start a productive, honest conversation about economic inequality, here are four questions we should be asking.
But what if the inequality gap really is proof in support of our feelings of injustice?
4. Inequality Can Be a Sign of Injustice
Hear me out on this one. I know inequality is an emotion-filled topic closely related to issues of racism, discrimination, and generational oppression. There are definitely some shady things going on that need to be fixed. I just want to make sure we’re going after the real problem.
People worried about economic inequality typically focus on gaps in wealth, income, and opportunity. They attack unequal distribution as being the real crime, with added emphasis on the “extreme and growing” divide between the haves and the have-nots. The heart of the concern seems to be that some have more. Isn’t the gap itself unjust?
Let’s imagine I bring home more trick-or-treat candy than my little brother because I’m able to cover twice the number of houses. It might be admirable for me to share my bounty, but there is nothing inherently unfair about our candy gap.
Now imagine the neighborhood bully has more candy because he stole from my little brother and his friends. That would be unjust. The injustice is the candy theft, not the candy gap.
Predatory institutions, such as slavery, are clearly unjust. So is a political system that facilitates billions of dollars in wealth transfers to the rich in the form of corporate subsidies, bailouts, and bloated government contracts. Forced transfers to those with power are on par with the neighborhood candy thief.
In his book Race & Economics, Walter Williams details how the natural incentives of an unhampered market promote tolerance, punish discrimination, and benefit the most disadvantaged members of society. Williams explains how political intervention in the labor market reduced opportunities and arrested progress for many black Americans.
Anywhere you see rigid inequality over time, the odds are good that there are laws and regulations in place giving some people unfair political advantages or shielding others from bearing the costs of discrimination. That is the real source of injustice.
5. Populist Policies Tend to Make Inequality Worse
The world has made enormous progress in our struggle to escape from under the oppressive thumb of power. We’ve seen vast reductions in hereditary privilege, state religion, and authoritarian monarchy. The radical idea of individual dignity and human rights even led to the abolition of the ancient, barbaric institution of slavery.
This is all relatively new to human history. Just because global poverty and inequality are falling doesn’t mean the trend will continue or that progress is happening quickly enough.
There is one concerning trend that should give us reason to pause. Those most fiercely attacking economic inequality are also proposing policies to consolidate the kind of power that is historically responsible for creating vast inequality in the first place.
Prominent intellectuals such as Joseph E. Stiglitz (Nobel Prize for Economics in 2001) are worried about the powerful influence the wealthy have on our political system. He believes our economy should be democratically accountable to “the people.” In “The American Economy Is Rigged,” Stiglitz’s agenda for fighting inequality includes:
Empowering the government to set the salaries private companies pay executives
Increasing government control of the financial industry
Ensuring affordable housing for all
Providing government-guaranteed access to health care
Increasing government funding for public education, including access to college for all
Increasing government power for setting the rules of “modern competition” in the marketplace
Granting stronger power for unions
Increasing government control over individual retirement programs
Reducing inheritance to prevent intergenerational advantages
Raising taxes
Like many people, Stiglitz is worried that the wealth of the super-rich gives them unfair access to control the distribution of social, economic, and political power.
Concerns about inequality are, rightfully, concerns about power. As such, we have good reason to be suspicious of calls for greater centralized power as the solution. Using the political means to address the symptom of economic inequality is like thinking that the One Ring forged by Sauron in the fires of Mount Doom can be held “democratically accountable.”
Coming Together
Thinking about issues like the imbalances of power in society can be overwhelming and frightening. Things become less scary if we come together in conversations that start by looking for common ground.
This Halloween, my IRL two-sentence horror story might be:
People in our communities were suffering. Instead of learning what actually makes people better off, we retreated to partisan battles on Facebook.
If horror stories aren’t your thing, check out FEE’s Made in Mékhé for the moving story of one entrepreneur fighting against poverty in her home country of Senegal by bringing the beauty of Africa to the world.
Jason Riddle is the Vice President of Programs and Strategic Operations at FEE. Prior to joining FEE, Jason spent over eight years as a management consultant working with a variety of public and private organizations to enhance their business performance through improved risk management, operational effectiveness, and control around internal and external reporting.
This article was originally published on FEE.org. Read the original article.
