Posts

Bernie Sanders and the Fixed Pie Fallacy by Chelsea German

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since.

Senator Sanders is not alone in his belief. Three out of four Americans agree with the statement, “Today it’s really true that the rich just get richer while the poor get poorer.”

Senator Sanders is half right: the rich are getting richer. However, his assertion that the poor are becoming poorer is incorrect. The poor are becoming richer as well.

Economist Gary Burtless of the Brookings Institute showed that between 1979 and 2010, the real (inflation-adjusted) after-tax income of the top 1% of U.S. income-earners grew by an impressive 202%.

He also showed that the real after-tax income of the bottom fifth of income-earners grew by 49%. All groups made real income gains. While the rich are making gains at a faster pace, both the rich and the poor are in fact becoming richer.

label

In addition to these measurable real income gains, decreases in prices have given the poor increased purchasing power, helping to raise living standards for the worst off in society. As a result of falling prices such as for groceries and material goods, along with gains in real income, Americans have more income left after basic expenses.

Technology has also become cheaper, improving our lives in unexpected ways. For example, consider the spread of cell phones. There was a time when only the wealthiest Americans could afford one. Today, over 98% of Americans have a cellular subscription, and the rise of smart phones has made these devices more useful than ever.

Unfortunately, progress has been uneven. In those areas of the economy where competition is hobbled, such as education, housing, and healthcare, prices continue to increase.

Still, the percentage of the population classified as living in relative poverty has decreased over time. Why then do three quarters of Americans, including Senator Sanders, believe that the poor are “getting poorer?”

A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer.

Fortunately, in the real world, the pie is not fixed. US GDP is growing, and it’s growing faster than the population.

Poverty remains a pressing issue, but Senator Sanders is incorrect when he says that the poor are becoming poorer. In the words of HumanProgress.org advisory board member Professor Deirdre McCloskey,

The rich got richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travelrights for womenlower child mortalityadequate nutrition, taller bodies, doubled life expectancyschooling for their kids, newspapers, a vote, a shot at university, and respect.

This post first appeared at HumanProgress.org.

Chelsea German

Chelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Loosening of Lending Standards Harms Low Income and Minority Americans

aei risk center logoThe Spring home buying season continues to show strength, buoyed by strong first-time buyer volume and share. Historically low mortgage rates, an improving labor market, and loose credit standards, combined with a 32-month-long seller’s market for existing homes, continue to drive up home prices faster than income.

The continued loosening of lending standards during a strong seller’s market is moving the goalpost further away for many lower income and minority renters desiring to become homeowners.

  • In June* first-time buyers accounted for 58.8 percent of primary owner-occupied home purchase mortgages with a government guarantee, up from 57.2 percent the prior June.
  • Increasing first-time buyer volume and share is being driven by increasing leverage and a strengthening job market.
  • The number of primary owner-occupied purchase mortgages going to first-time buyers in June totaled an estimated 128,000, up 20 percent from the 107,000 mortgages in June 2014
  • The Agency FBMRI stood at a series record of 15.83 percent, up 0.5 percentage point from the average over the prior three months and up 1.1 percentage points from a year earlier.
  • The Agency FBMRI is 6¾ percentage points higher than the mortgage risk index for repeat home-buyers, and the gap has been widening.
  • Nearly 55 percent of agency first-time buyer loans were high risk (an MRI above 12%) in June, up from 51 percent a year earlier.
  • As demonstrated below, the extremely small sample size of the NAR’s realtor survey generates monthly noise that tends to mask both seasonal and underlying trends in first-time buyer share, trends readily apparent in the AEI combined first-time buyer share index.

The First-Time Buyer Mortgage Share and Mortgage Risk Indexes (FBMSI and FBMRI) are key housing market indicators based on monthly data for nearly all government-guaranteed home purchase loans, which greatly reduces the risk of sample error. By relying on millions of loans, this approach stands in contrast to traditional first-time buyer surveys based on small samples of home-buyers or real estate agents.

In June 2015, first-time buyers accounted for 58.8 percent of primary owner-occupied home purchase mortgages with a government guarantee, according to the Agency First-Time Buyer Mortgage Share Index (FBMSI).  As shown in the chart below, the June share was 0.2 percentage point above the revised share of 58.6 percent for May and 1.6 percentage points above the June 2014 share of 57.2 percent.  Through March of this year, the first-time buyer share had displayed no clear trend apart from seasonal variation. But the increases in April, May, and June pushed the share to successive new highs, supported by improvements in the labor market, riskier mortgage lending, and continuing low mortgage rates.  These factors, combined with a 33-month-long seller’s market for existing homes as reported by the National Association of Realtors (NAR)[1], are driving up home prices faster than income.

“The housing lobby, led by the NAR and the Urban Institute, has successfully pushed for looser lending standards for first-time buyers,” noted Edward Pinto, co-director of the American Enterprise Institute’s (AEI’s) International Center on Housing Risk. “Rather than increasing accessibility, the loosening of lending standards during a strong seller’s market is moving the goalpost further away for many lower income and minority renters desiring to become homeowners.”

The chart below displays the monthly first-time home-buyer percentage by agency.  As shown, the share varies widely across agencies.  FHA is at the high end with a share at or above 80 percent, while Freddie Mac is at the low end with a share of about 40 percent.  Fannie Mae’s share has consistently tracked somewhat above Freddie’s and stood at 46.7 percent in June. Fannie’s share is higher because of its much greater volume of 97 percent LTV loans for first-time buyers relative to Freddie.  These loans carry substantial risk and account for most of the gap between Fannie’s MRI for first-time buyers (8.18 percent in June) and Freddie’s (6.72 percent).

As shown by the blue line in the chart below, the Combined FBMSI (which measures the share of first-time buyers for both government-guaranteed and private-sector mortgages) stood at an estimated 52.9 percent in June 2015.  Consistent with the agency series, the broader combined share moved to successive highs in April, May, and June, after having varied seasonally with no trend over the prior two years.  The first-time buyer share published monthly by the NAR, the dotted red line, also has risen to the highest level over the period shown.  Although the two series are currently sending the same message, the NAR series provides a much noisier signal month to month because of its small sample size.[2]

The first-time buyer share shown by the combined FBMSI is much higher than that estimated by the NAR survey of realtors and the separate NAR survey of homebuyers and sellers.  This gap largely appears to reflect a difference in the definition of first-time buyers.  In the federal agency data that we use, first-time buyers include purchasers who owned a home more than three years ago but not in the past three years.  The NAR surveys ask whether the purchaser is a first-time buyer, without further instruction.  Survey respondents likely apply a literal definition of first-time buyers, which would exclude purchasers who owned a home more than three years ago.[3]  The broader definition in the federal agency data captures the full set of households transitioning from renter to homeowner status and thus provides a more complete measure of changes in demand for owner-occupied housing.  The rising first-time buyer share and the strong increase in first-time buyer sales volume shown by our broad definition help explain the tightening inventory conditions in the long running seller’s market.  The unsold inventory of existing single-family homes stood at 5.2 months in May, down from 5.6 months a year earlier; for new single-family homes, the unsold inventory was 4.5 months in May, down from 5.1 months a year earlier.[4]

The monthly count of agency first-time buyer mortgages (theAgency FTB Loan Count) is presented in the chart below.  The number of primary owner-occupied purchase mortgages going to first-time buyers in June totaled an estimated 128,000, up 20 percent from the level in June 2014.  This increase in the Agency FTB Loan Count outpaced the 15½ percent rise in total agency purchase loan volume over the same period.

The Agency FTB Loan Count and the Agency FBMSI are calculated, as noted above, from a nearly complete dataset of government-guaranteed home purchase loans, which greatly reduces the risk of sample error. Data on the importance of first-time homebuyers for non-agency loans are not available to our knowledge from any source.  The Combined FBMSI is calculated from the agency loan data, along with assumptions for non-agency loans that we believe to be reasonable.

“While the strength of this Spring’s homebuying season is noteworthy, it is being unsustainably fueled by increasing leverage,” said Pinto. “This leaves first-time buyers and neighborhoods vulnerable to excessive defaults.”

“We paint an accurate picture of changes in the first-time buyer share by using a nearly complete census of agency loans,” said Stephen Oliner, co-director of AEI’s International Center on Housing Risk.  “In contrast, the monthly changes in the first-time buyer share from the NAR survey are often just noise.”

AEI’s Agency First-Time Buyer Mortgage Risk Index (FBMRI) estimates the share of first-time buyer mortgages that would default in a stress event comparable to the 2007-08 financial crisis based on the actual performance of loans originated in 2007.  The Agency FBMRI stood at 15.83 percent in June, up 0.5 percentage point from the average over the prior three months and up 1.1 percentage points from a year earlier. As indicated in the chart below, the Agency FBMRI is 6¾ percentage points higher than the mortgage risk index for repeat home-buyers, and the gap between the two series has been growing.

The higher risk for the mortgages taken out by first-time buyers is largely due to risk layering. As shown in the table below, in June 2015, 71 percent of first-time buyer mortgages had a combined loan-to-value ratio (CLTV) of 95 percent or higher, and 97 percent had a 30-year term. Given the combination of little money down and slow amortization, these buyers will have very little home equity for a number of years unless their house appreciates substantially. In addition, more than one-fifth of first-time buyers taking out mortgages had a FICO score below 660, the traditional definition of subprime mortgages, and one-quarter had total debt-to-income ratios above 43 percent, the limit set by the Qualified Mortgage rule.  The mortgages taken out by repeat buyers are less risky along two dimensions in particular: a much smaller share had a CLTV of 95 percent or higher and a smaller share had a FICO score below 660.

Characteristics of Mortgages Taken Out by First-Time and Repeat Home-buyers:

June 2015
CLTV ≥ 95% 30-year Term FICO < 660 DTI > 43%
First-time Buyers 71% 97% 22% 25%
Repeat Buyers 38% 91% 9% 23%
Source.  AEI International Center on Housing Risk, www.HousingRisk.org

This risk profile for first-time buyers implies that the supply of mortgage credit to this group is not tight.  In June 2015, the median first-time buyer with an agency mortgage made a downpayment of only 3 percent, or $6900 in dollar terms.  Moreover, the median FICO score in June for first-time buyers with agency mortgages was 706, slightly below the median of 713 for all individuals in the United States with a score.[5] For first-time buyers with FHA-insured loans, the median FICO score in June was only 674, well below the middle of the distribution for the U.S. as a whole. These data are a strong counterpoint to the frequent claims that first-time buyers face difficulties in obtaining mortgages.

“Our data refute the conventional wisdom that first-time buyers face tight credit,” said Oliner.  “Many first-time buyers with ordinary credit scores are purchasing homes every month with little money down.”

ABOUT THE FBMSI AND FBMRI

The FBMSI and FBMRI are objective and transparent measures of the first-time buyer share and the riskiness of first-time buyer mortgages, respectively, based on the millions of loans contained in the National Mortgage Risk Index (NMRI) database developed by AEI’s International Center on Housing Risk. The FBMSI, FBMRI, and NMRI are updated monthly.  For more information about these indexes and the work of the center, please visit HousingRisk.org or contact Edward.Pinto@AEI.org or Stephen.Oliner@AEI.org.

REFERENCES:

[1] According to the NAR, a seller’s market exists when the inventory of existing homes for sale would be exhausted in six months or less at the current sales pace.http://www.realtor.org/news-releases/2013/04/march-existing-home-sales-slip-due-to-limited-inventory-prices-maintain-uptrend The Census Bureau publishes parallel inventory and sales data for new homes.  Based on the Census data, May 2015 was the 43rd out of the last 44 months of a new home seller’s market using the NAR definition of six months’ supply or less.  The NAR and Census data on months’ supply are posted on the FRED site maintained by the Federal Reserve Bank of St. Louis (https://research.stlouisfed.org/fred2/series/HSFSUPUSM673N for the NAR series and https://research.stlouisfed.org/fred2/series/MSACSR for the Census series).

[2] The NAR’s monthly survey (http://www.realtor.org/reports/realtors-confidence-index) is sent to more than 50,000 realtors (out of a total of 1.1 million members), but has a low response rate; only 3,805 responses were received for the May 2015 survey and of these, only 2,247 realtors provided information based on the last sale they had closed in May.  The NAR’s separate annual survey of homebuyers and sellers also suffers from small sample problems.  For the 2014 survey, responses were received from only 9 percent of those mailed the survey, and these responses constituted only 0.2 percent of all purchase loans originated during the 12-month period covered by the survey.

[3] For details about the estimated effect of this definitional difference on the first-time buyer share, see footnote 2 in the May 2015 first-time buyer data release (http://www.housingrisk.org/first-time-buyer-mortgage-share-and-mortgage-risk-indexes-for-may-2015/#more-1781).

[4] See footnote 2 above for the links to the NAR and Census data.

[5] The national median score is from FICO; the other FICO scores cited here are from AEI’s International Center on Housing Risk.

Helping Pope Francis to Help the Poor

With probably trillions in gold, Pope Francis has a good idea about sharing the wealth. Would he be willing to set a good example and say, “Follow me”?

If you Google “gold to the Vatican,” the first page of 7,080,000 results includes numerous links to $170 million in gold from Nazi Germany taken from the teeth of Jewish people gassed to death.

There are also 55,000 results for “gold to the Vatican” in videos with some of the same points in the below YouTube video. On the 2nd page of “gold to the Vatican” is a link to an article re: the Philippines as the “wealthiest nation on earth” and an explanation of “why the Diaz Last Will allotted 15% or around 90,000 metric tons of gold to the Vatican.” This is just the tip of the iceberg.

International Monetary Fund Whisteblower Karen Hudes says some of our tax dollars go to the UK by treaty and then to the Vatican Bank, raising huge questions — How can this be (@7:30 minutes)?

New World gold acquisition may have started with Cortez and the conquest of the Aztecs. I have seen cathedrals in Latin America with much gold. And it confirms the Bible’s reference to a woman in Revelation 17 that some Protestants interpret as the Vatican. She’s described as involved with kings and politics, arrayed in purple and scarlet and decked with gold, precious stones and pearls, having a golden cup in her hand, Rev 17:2,4. Sounds like wealth, and sitting on seven hills [Rome], Rev 17:9,

So why would Pope Francis ask the only historically Protestant nation to help when he’s had the resources of Inter-America and South America at his command for centuries?

How does Pope Francis explain their poverty when Catholicism has dominated them? In the early 1960’s I spent a summer in Colombia and Venezuela when a third of the people couldn’t read or write –a sharp contrast to men like Jefferson, Madison, Adams and Lincoln who had no benefit of our great public schools of today. Maybe they were (God forbid) homeschooled!

Shouldn’t we start asking questions before we jump into a socialist pot to share what we have with everyone else? Maybe the first question would be how much wealth does the Vatican have? Can we inspect it like we would like to inspect Iran’s nuclear developments?

Catholic means universal, and we have a congress that is catholic—not Roman Catholic, but (little c) catholic–universal that wants to go along to get along and so very few with the guts to stand for what’s right, even at the risk of personal loss.

And maybe that explains how the Supreme Court works with a majority of Catholic justices favoring Obamacare that will surely ruin America, if same sex marriage doesn’t do it first with their approval. Is Protestantism dead? If we don’t speak out now, we must forever hold our peace. Freedom of press is nearly gone, but 7,080,000 results for “gold to the Vatican” deserves a bigger picture of how we got here from the Catholic World–

“There is, ere long, to be a state religion in this country, and that state religion is to be the Roman Catholic.”

1st. The Roman Catholic is to wield his vote for the purpose of securing Catholic ascendancy in this country.

2nd. All legislation must be governed by the will of God, unerringly indicated by the pope.

3rd. EDUCATION must be controlled by Catholic Authorities, and under education the opinions of the individual and the utterances of the press are included, and many opinions are to be forbidden by the secular arm, under the authority of the Church, even to war and bloodshed.”

– Father Hecker, Catholic World, July 1870.

RELATED ARTICLES:

How Rich Is the Catholic Church?

Pope Francis is unduly pessimistic about the world – Catholic Herald

Pope Francis’ Encyclical Is About More Than Climate Change

North Korea’s Brutal Regime, Not the Weather, Primary Culprit for Nation’s Food Shortage

U.S. Taxpayers Footing Costs for Solar-Thermal Technology Failures

Head of new Earth Corps program hopes to emphasize Franciscan spirituality

Franciscan Earth Corps A Special Emphasis on Climate Justice

Ecology Theology

EDITORS NOTE: Dr. Richard Ruhling is a physician whose interest in retirement includes a concern for where we are going in America. He offers more information at his website: http://ChooseABetterDestiny.com.

The Government Cannot And Will Not Solve Poverty

Jesus Christ stated that the poor you will always have amongst you.  However, he did not say that the problem of being poor could not be solved.  In fact, again He said “the poor you will always have amongst you.”   I interpret that to mean that despite viable solutions to poverty, people, especially progressive government officials eventually increase poverty, not decrease it.  America is still reeling from the awful effects of Lyndon Baines Johnson’s “War on Poverty.”  After $20 Trillion and counting spent to fight poverty with tax-payers dollars has resulted in a higher poverty rate now than in the 1960s.

I find it ironic when those who have never run a business, vie for political office and declare they will provide jobs.  I guess I will give Donald Trump a pass after saying “I will be the greatest jobs president God ever created” because he has provided both jobs and business opportunities for many thousands of people.  But government has never, ever created jobs without extracting monies from the wealth producing economy to pay for government jobs.  Many of which are wasteful duplications and don’t get me started on economy draining burdensome departments like the IRS, Department of Education, the Just us uh Justice Department and everyone’s favorite, the EPA all of which have the problems they were supposed to address, much worse.

Unfortunately, that practice has run most of America’s once gleaming major cities into the ground politically, morally, economically and economically.  Under liberal/progressive policies have been immorally manipulated to barely function under the false premise that American style inequality and unfairness entitles certain people to your hard earned money.  How long do you think that “We the People” can afford to allow ourselves to be seduced by the evil lies of the progressive game of lying to us and draining us of our earnings, while making it more difficult for the next generation to reach their vision of the American dream?

Because of the non-stop onslaught of lies, government school indoctrination, trillions of dollars of annual wasteful spending, then the many international trade agreements that always grant advantages to competitor nations America is in a heap of hurt.  Right now, our republic is on the brink of utter collapse.  Despite the obvious situation, government officials continue to methodically shrink the U.S. economy.  Of course, as a result there are more and more so-called dependents every single year.  The thirty plus million illegal immigrants, who President Obama, presidential candidate Hillary Clinton and California governor Jerry Brown want taxpayers to pay for everything the illegals desire and demand.  So now, some Americans are asking why should I bust my hump just to have my earnings taken away and given to illegal immigrant moochers?

The Congressional Budget Office recently warned that if congress does not soon reign in over spending, over taxation and I’ll throw in over regulations, our prosperous way of life will be negatively altered permanently in less than ten years.  By now it would seem that America would have learned from the five-plus decades of offensive progressive blunders foisted upon Detroit.  That once great city was per capita the wealthiest city in the world in 1962.  In November of that year progressive democrat Cavanaugh was elected as mayor.  The changes in policies he enacted were a dramatic departure from the previous republican administrations.  Almost immediately, there was a piling on of regulations and layers of taxes that set that city on a downward spiral she has yet to recover from.

Right now the percentage of working Americans is declining while the dependent class is rapidly multiplying.  What can be aptly described as the American welfare state is not shrinking as we are so often told by progressive democrats and rino republicans.  In fact the $1 Trillion a year fighting poverty fighting budget is a planned abysmal failure.  Most politicians, including president Obama know this.  I remember telling people, long before Obama was elected as president that he and many others want to do to America what was done to Detroit.  Unless some major changes are made in the very near future they will reach their goulash goal.

For example, federal and overall welfare spending is going up.  The federal government alone currently funds and operates 126 different welfare or anti-poverty programs.  Federal welfare spending alone totals more than $14,848 for every poor man, woman, and child in this country.  For a typical poor family of three, that amounts to more than $44,500.  Combined with state and local spending, the government spends $20,000  for every poor person in America, or $61,830 per poor family of three.

Yet government economic no growth policies such as draconian environmental regulations with our republic being the most taxed on earth, stymies the ability to create new economic opportunities, while chasing away or killing off existing businesses.  This brutal assault on America’s onetime prosperous economy only serves to threaten our blessed way of life, while whetting the appetites of our enemies both foreign and domestic who seek to overthrow us.

May America soon seek Providential guidance and reclaim the wisdom that made her the onetime envy of the world, before it is much too late.

Hillary Clinton: For Richer or Richer

For an answer to this question, we need to check in with four experts. The first is ‘Rich Hillary Clinton.’ Rich Hillary Clinton, who has been paid more for an hour-long speech than the average median ANNUAL earnings of four American families combined, has stated about her massive wealth, “We pay ordinary income tax, unlike a lot of people who are truly well off, not to name names; and we’ve done it through a dint of hard work.”

Clearly, Rich Hillary Clinton understands that hard work can lead to a prosperous future for those willing to put in the sweat equity, despite the fact that the Clintons consider speaking engagements “hard work” (full disclosure, I have been paid to speak at events and do not consider it “hard work”). Rich Hillary Clinton also believes that she pays her “fair share” of taxes “unlike a lot of other people who are truly well off.”

Rich Hillary Clinton says this despite the fact that, according to Bloomberg News:

Bill and Hillary Clinton have long supported an estate tax to prevent the U.S. from being dominated by inherited wealth. That doesn’t mean they want to pay it. To reduce the tax pinch, the Clintons are using financial planning strategies befitting the top 1 percent of U.S. households in wealth. These moves, common among multimillionaires, will help shield some of their estate from the tax that now tops out at 40 percent of assets upon death.

Countering the assertion that Rich Hillary Clinton is in fact rich is another expert on this topic: Poor Hillary Clinton. Poor Hillary Clinton has stated this about her financial status:

We came out of the White House not only dead broke but in debt.” Poor Hillary Clinton also stated, “We had no money when we got there and we struggled to, you know, piece together the resources for mortgages for houses, for Chelsea’s education, you know, it was not easy.

America should cry for Poor Hillary Clinton. After all, how can we be expected to ignore the desperate pleas for help from a family worth a measly hundred million dollars? I’m wondering if conservatives should band together to create a foundation called the Clinton Foundation to donate to the plight of this struggling American family.

For those still confused about who is in fact considered wealthy and who is not after the Rich Hillary Clinton versus Poor Hillary Clinton debate, our second series of experts on American wealth should be consulted. Rich Alcee Hastings from Florida’s 20th Congressional District earns more in one year than the median income of three average American families combined. Rich Alcee Hastings is so confident about his wealth, and his congressional salary which places him near the top 10% of income earners in the United States, that he feels anyone earning this outrageous sum should pay even more than they do now. In an April 2014 press release, Rich Alcee Hastings stated:

We could end special tax breaks and close tax loopholes available only to the wealthiest Americans. This alone could get us $1 trillion over the next ten years. We could also stop the wealthiest among us from using overseas tax havens to avoid paying their fair share. Along these same lines, let us rid our tax code of ridiculous loopholes like deductions for yachts and the loophole for corporate jets.

Rich Alcee Hastings may not be aware that the top 10% of income earners already pay close to 70% of income taxes, but we’ll forgive him for that because rich people such as him rarely know how much money is missing from their bank accounts.
Tax Share Chart

Painting a starkly different picture is Poor Alcee Hastings. Poor Alcee Hastings was recently quoted complaining about how little money he makes as a hard-working U.S. congressman. Poor Alcee Hastings said Congress is not “being paid properly” and that “Members [of Congress] deserve to be paid, staff deserves to be paid, and the cost of living here is causing serious problems for people who are not wealthy to serve in this institution.” Poor Alcee Hastings has a point here, which Rich Alcee Hastings should consider when deciding who is wealthy and who is not: cost of living and business expenses matter to many Americans who appear wealthy on paper.

Conservatives fight for lower tax rates because, although we understand the importance of taxes to fund the constitutional role of government, we don’t want to pay any more than necessary.

Ok, enough with the satire.

I wrote this piece because sometimes humor is the only way to effectively combat the far Left and its stunning hypocrisy. The hard Left debates themselves with contradictory statements about important issues such as the value of work, fair-share tax rates, income inequality, wealth, the cost of living, and more – all while lecturing us like schoolchildren.

There’s no hypocrisy in basic conservative principles, and that’s why in a world occupied by fallible human beings the default position should be the one that doesn’t contradict itself. Conservatives fight for lower tax rates because, although we understand the importance of taxes to fund the constitutional role of government, we don’t want to pay any more than necessary. Conservatives fight for personal control of healthcare choices because that’s what we want for ourselves. And, we fight for educational choices because that’s what we want for our children. This upcoming presidential election is too important to forfeit because we’re afraid of a good fight. Now is the time to boldly defend conservative principles and shed light on the fact that the hard Left’s “principles” are really nothing more than talking points.

EDITORS NOTE: This column originally appeared in the Conservative Review. The featured image is by Elise Amendola | AP Photo. Reprinted with permission.

CLICHÉS OF PROGRESSIVISM #40 — “The Rich Are Getting Richer and the Poor Are Getting Poorer”

Imagine you could go back in time 50 years. Suppose the reason you are doing so is to put policies into place that would ensure that the rich got richer and the poor got poorer. (Why anyone would want to do this is beside the point, but stay with me.) What policies would you set?

  1. You would want to price poor, unskilled people out of the labor market with an ever-increasing minimum wage;
  2. You would provide special favors, artificial competitive advantages, and taxpayer subsidies to the politically well-connected (i.e., those already rich);
  3. You would stifle new, small businesses with stacks of regulations and bureaucratic paperwork;
  4. You would (literally) pay people to stay in poverty, to be dependent on government, so that any work ethic would be suppressed and eroded.
  5. You would implement an erratic and largely inflationary monetary policy that erodes savings and creates destructive booms and busts.

All five of these in combination might do the trick. Throw up barriers to the progress of the poor, or pay people to stay poor, or rig the system so the rich and politically well-connected get artificial economic advantages and chances are, the poor will indeed get poorer and the rich will get richer.

By now you have probably noticed that every one of the policies above has been implemented to varying degrees since the Great Society. And yet the poor have still not gotten poorer in the United States.

According to professional skeptic Michael Shermer:

The top-fifth income earners in the U.S. increased their share of the national income from 43 percent in 1979 to 48 percent in 2010, and the top 1 percent increased their share of the pie from 8 percent in 1979 to 13 percent in 2010. But note what has not happened: the rest have not gotten poorer. They’ve gotten richer: the income of the other quintiles increased by 49, 37, 36 and 45 percent, respectively.

Detractors will try to argue that the poorest quintiles have a smaller percentage of the overall pie. And that might be true, but the pie is much, much bigger. Would you rather have 50 percent of a million or 20 percent of a billion? Another way of putting this is: Would you rather be better off, even if that meant certain people were super well off? Or would you rather everyone were worse off, as long as everyone were relatively equal?

That the poorest among us are still, on balance, doing better today than they were 50 years ago is a remarkable testimony to what relatively free people and markets can do, even as governments put up roadblocks. So if the poor aren’t getting poorer, why do people say they are?

If one starts with the assumption that an equal distribution of wealth is the ultimate goal, then he or she is not terribly concerned with how much of that wealth is created to begin with. But some people, at least, understand that wealth has to be created and that when there is more wealth created the poorest among us will tend to be better off. The choice of starting points boils down then to whether one cares about distributing wealth evenly or growing overall wealth through productive activity.

One reason this particular cliché manages to hang around is that people generally take a static view of the economy. The idea is that wealth is like a giant pie, which neither grows nor shrinks, but gets carved up and distributed certain ways. So, some people end up with the false idea that the only way the rich can be richer is if part of the wealth pie is taken from the poor. From this they conclude justice demands a different distribution of the pie. Advocates of “meritocracy” believe the static pie should be divided according to talent and hard work. Advocates of “social justice” think the pie should be divided according to some concept of equality. Both are wrong, but the fundamental error is in thinking that wealth is a static pie to start with. It is not.

Wealth can better be imagined as a growing pie, or better, a growing ecosystem. Of course, wealth doesn’t always grow, but it tends to—as long as people have the incentives to be productive. Merit and hard work tend to be rewarded in this growing pie, but rewards more generally accrue to those who create value for others.

In other words, someone who works really hard might not be rewarded if no one finds his work valuable—say, a man who digs ditches and fills them up again. Likewise, work that might be considered meritorious in an obscure academic journal might not confer any earthly good on humanity outside of the journals’ four-person review committee.

Advocates of so-called social justice want the wealth pie to be divided according to an arbitrary and subjective abstraction like “fairness” or equal outcomes. But carving up wealth according to some nebulous concept of justice ignores the actual ecosystem in which people operate. In other words, such a concept ignores the behaviors, incentives and exchanges that encourage people to be productive—i.e. to generate wealth. By distributing from rich to poor, you end up paying poorer people to be less productive, while punishing more productive people. The distribution that would flow from people making more goods and services available to all is lost by degree, making everyone worse off. If taxation and redistribution for the sake of equal outcomes makes us all worse off than we would otherwise have been, how is this social justice?

Egalitarian concepts of social justice also ignore any moral considerations that might attach to how an unequal distribution might have come about. If growing overall wealth is about people creating different degrees of value for each other, and taking different risks, then the rewards of value creation will never flow equally. Some people will make more money than others, for example, whether it’s because they were smarter investors, cleverer innovators, or better organizers. The rest of us enjoy the fruits of those efforts, so we might want successful people to keep investing, innovating and organizing — even if that means they get richer. And we might want to acknowledge that they deserve what they have.

(Editor’s Note: Economist Thomas Sowell has said, “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?” I often ask this question of a redistributionist in the presence of another person and ask the former to specifically tell me how much is his ‘fair share’ of what the other person in our presence has earned. I’m still waiting for a satisfactory answer.)

Those of us who are not as productive (or, politically well-connected, as the case may be) still enjoy remarkable abundance in relatively free societies. In the United States, for example, all quintiles have become wealthier overall, over the last 30 years.

It is also true that there are fewer desperately poor people around the world. In only 20 years, extreme global poverty has been cut in half.  That is a remarkable achievement—one that is attributable to policies of liberalization (freer markets) around the world, which progressive activists and egalitarians decry. In other words, those who say the poor are getting poorer are simply wrong. And there are hundreds of millions of people thriving today who can talk about how much better things have gotten.

Summary

  • Progressives should be honest and admit that the anti-free market policies they’ve promoted and achieved in the last half-century have disadvantaged the poor and conferred favors upon the rich and politically well-connected.
  • Amazingly, in spite of those policies, the poor overall are still better off than they were 50 years ago. Imagine the progress that might have happened had these policies not been in place!
  • Redistributing wealth is just slicing the pie differently, at the risk of shrinking the pie. It’s a static view of wealth, one that’s greatly inferior to a view of baking a bigger pie for everybody.

For further information, see:

How the World is Getting Better” by Phil Harvey

The World is Getting Better” by Sam Harris

The Free Market: Lifting All Boats” by Don Mathews

Dear Ultra-Rich Man” by Max Borders

Free the Poor” by Julian Adorney

The Quackery of Equality” by Lawrence W. Reed

If you wish to republish this article, please write editor@fee.org.

ABOUT MAX BORDERS

Max Borders is the editor of The Freeman and director of content for FEE. He is also cofounder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

(Editor’s Note: The author is director of content at the Foundation for Economic Education and editor of its journal, The Freeman.)

Cliches of Progressivism: Rich People Have an Obligation to Give Back by Lawrence W. Reed

For a society that has fed, clothed, housed, cared for, informed, entertained, and otherwise enriched more people at higher levels than any in the history of the planet, there sure is a lot of groundless guilt in America.

Manifestations of that guilt abound. The example that peeves me the most is the one we often hear from well-meaning philanthropists who adorn their charitable giving with this little chestnut: “I want to give something back.” It always sounds as though they’re apologizing for having been successful.

Translated, that statement means something like this: “I’ve accumulated some wealth over the years. Never mind how I did it, I just feel guilty for having done it. There’s something wrong with my having more than somebody else, but don’t ask me to explain how or why because it’s just a fuzzy, uneasy feeling on my part. Because I have something, I feel obligated to have less of it. It makes me feel good to give it away because doing so expunges me of the sin of having it in the first place. Now I’m a good guy, am I not?”

It was apparent to me how deeply ingrained this mindset has become when I visited the gravesite of John D. Rockefeller at Lakeview Cemetery in Cleveland a couple years ago. The wording on a nearby plaque commemorating the life of this remarkable entrepreneur implied that giving much of his fortune away was as worthy an achievement as building the great international enterprise, Standard Oil, that produced it in the first place. The history books most kids learn from these days go a step further. They routinely criticize people like Rockefeller for the wealth they created and for the profit motive, or self-interest, that played a part in their creating it, while lauding them for relieving themselves of the money.

More than once, philanthropists have bestowed contributions on my organization and explained they were “giving something back.” They meant that by giving to us, they were paying some debt to society at large. It turns out that, with few exceptions, these philanthropists really had not done anything wrong.

They made money in their lives, to be sure, but they didn’t steal it. They took risks they didn’t have to. They invested their own funds, or what they first borrowed and later paid back with interest. They created jobs, paid market wages to willing workers, and thereby generated livelihoods for thousands of families. They invented things that didn’t exist before, some of which saved lives and made us healthier. They manufactured products and provided services, for which they asked and received market prices.

They had willing and eager customers who came back for more again and again. They had stockholders to whom they had to offer favorable returns. They also had competitors and had to stay on top of things or lose out to them. They didn’t use force to get where they got; they relied on free exchange and voluntary contract. They paid their bills and debts in full. And every year they donated some of their profits to lots of community charities that no law required them to support. Not a one of them that I know ever did any jail time for anything.

So how is it that anybody can add all that up and still feel guilty? I suspect that if they are genuinely guilty of anything, it’s allowing themselves to be intimidated by the losers and the envious of the world, the people who are in the redistribution business either because they don’t know how to create anything or because they simply choose the easy way out. They just take what they want or hire politicians to take it for them.

Or like a few in the clergy who think that wealth is not made but simply “collected,” the redistributionists lay a guilt trip on people until they disgorge their lucre—notwithstanding the Tenth Commandment against coveting. Certainly, people of faith have an obligation to support their church, mosque, or synagogue, but that’s another matter and not at issue here.

A person who breaches a contract owes something, but it’s to the specific party on the other side of the deal. Steal someone else’s property and you owe it to the person you stole it from, not society, to give it back. Those obligations are real and they stem from a voluntary agreement in the first instance or from an immoral act of theft in the second. This business of “giving something back” simply because you earned it amounts to manufacturing mystical obligations where none exist. It turns the whole concept of “debt” on its head. To give it “back” means it wasn’t yours in the first place, but the creation of wealth through private initiative and voluntary exchange does not involve the expropriation of anyone’s rightful property.

How can it possibly be otherwise? By what rational measure does a successful person in a free market, who has made good on all his debts and obligations in the traditional sense, owe something further to a nebulous entity called “society”? If Entrepreneur X earns $1 billion and Entrepreneur Y earns $2 billion, would it make sense to say that Y should “give back” twice as much as X? And if so, who should decide to whom he owes it? Clearly, the whole notion of “giving something back” just because you have it is built on intellectual quicksand.

Successful people who earn their wealth through free and peaceful exchange may choose to give some of it away, but they’d be no less moral and no less debt-free if they gave away nothing. It cheapens the powerful charitable impulse that all but a few people possess to suggest that charity is equivalent to debt service or that it should be motivated by any degree of guilt or self-flagellation.

A partial list of those who honestly do have an obligation to give something back would include bank robbers, shoplifters, scam artists, deadbeats, and politicians who “bring home the bacon.” They have good reason to feel guilt, because they’re guilty.

But if you are an exemplar of the free and entrepreneurial society, one who has truly earned and husbanded what you have and one who has done nothing to injure the lives, property, or rights of others, you are a different breed altogether. When you give, you should do so because of the personal satisfaction you derive from supporting worthy causes, not because you need to salve a guilty conscience.

Lawrence W. Reed
President
Foundation for Economic Education

Summary

  • The innocent-sounding phrase, “I want to give back,” far too often implies guilt for having been productive or successful.
  • If you earned your wealth through free and voluntary exchange, don’t let others get away with making you feel guilty just because you have it.
  • The people who really should “give it back” are those to whom it doesn’t belong or who took it from others in the first place.
  • For further information, see:

“On Giving Back” by George C. Leef: http://tinyurl.com/lqd3lo6

“Give Up on Giving Back?” by Sandy Ikeda: http://tinyurl.com/or7jhh3

“Giving Back” by Steven Horwitz: http://tinyurl.com/pwqjqzw

20130918_larryreedauthorABOUT LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

EDITORS NOTE: Versions of this essay have previously appeared in FEE’s journal, The Freeman, under the title, “Who Owes What to Whom?”

The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government.

Our society is inundated with half-truths and misconceptions about the economy in general and free enterprise in particular. The “Clichés of Progressivism” series is meant to equip students with the arguments necessary to inform debate and correct the record where bias and errors abound.

The antecedents to this collection are two classic FEE publications that YAF helped distribute in the past: Clichés of Politics, published in 1994, and the more influential Clichés of Socialism, which made its first appearance in 1962. Indeed, this new collection will contain a number of essays from those two earlier works, updated for the present day where necessary. Other entries first appeared in some version in FEE’s journal, The Freeman. Still others are brand new, never having appeared in print anywhere. They will be published weekly on the websites of both YAF and FEE: www.yaf.org and www.FEE.org until the series runs its course. A book will then be released in 2015 featuring the best of the essays, and will be widely distributed in schools and on college campuses.

See the index of the published chapters here.

Raising the National Debt – Doing Evil in the Name of Good

debt

Many people see government debt, over regulation and control of individuals, families and our natural resources as necessary to the good of the collective. May I humbly suggest that this is a violation of natural law as envisioned by our Founding Fathers in the Constitution?

Debt is in and of itself not immoral if the person encumbers himself for a his purpose – expanding a business, building a home or sending a child to college. It becomes an immoral act when debt is incurred without the consent of the indebted. The National Debt is taxation of the individual and future generations without representation.

This summer President Obama will ask Congress to raise the debt ceiling.

This effort will become political theatre of the first order with the media. Both sides will be touting the good and the bad of raising the debt ceiling. I predict that the debt ceiling will be raised, which is the consummate example of doing evil in the name of good. Progressives will argue that the poor will be harmed if the debt ceiling is not raised. Their plea is that only government can sustain the poor for the poor will never be capable of sustaining themselves due to a corrupted society.

Their argument is false on its face.

It is false because it is government that defines poor, not the poor defining themselves. There have been since time immemorial those who have more and those who have less. However, it has only been recently that those with less have been defined as a “class of poor”. Charles Murray in his book “Coming Apart: The State of White America, 1960-2010” notes, “Michael Harrington’s The Other America created a stir when it was published in 1962 partly because Harrington said America’s poor constituted a class separate from the working class – a daring proposition. At the time, the poor were not seen as a class, either by other Americans or in their own eyes. The poor were working-class people who didn’t make much money.”

The public debate is all about jobs. Jobs mean a working class. The working class consists of all those working or earning a living or having a job not supported by government subsidy. The private sector working class has shrunk under both Democrat and Republican administrations. There is a growing concern that today more people vote for a living than work for a living. The private sector creates prosperity, which in turn creates jobs, which in turn allows the working class to advance and be less poor. Prosperity comes from productive work, not government welfare.

Government at every level consumes wealth and uses it for its own ends. Our republican form of government was created to protect individual property. Property was defined in broad terms by James Madison, author of the Constitution. Madison wrote, “[Property] embraces everything to which a man may attach a value and have a right: and which leaves to everyone else the like advantage. In the former sense, a man’s land, or merchandize, or money is called his property. In the latter sense, a man has property in his opinions, and the free communication of them.”

Madison believed, “As a man is said to have a right to his property, he may be equally said to have a property to his right.”

Take away a man’s property and he is no longer a man but a slave. Government at every level has created reasons to limit man in both its property right and his right to property. For decades the federal, state and local governments have instituted laws and regulations designed to smother property rights. Government at every level is becoming what Thomas Jefferson called the “feudal-ruler form of government”. In the feudal-ruler scheme according to Brian Sussman, author of “Eco-Tyranny: How the Left’s Green Agenda will Dismantle America”, “The rights of the government become superior to the rights of citizens.”

Only when men and women own property are they truly free. We must be superior to our government or tyranny will reign supreme – forever.