Few Americans have a basic working knowledge of economics. They’ve grown up in a capitalist system, and so they take it for granted. But taking their economic system for granted leaves the door open for demagoguery. Most leftist economic arguments go something like this: The world is unfair. Wouldn’t it be nice if the world were more fair? Give power to government and the world will become more fair.
It isn’t true. Capitalism isn’t merely an efficient way to distribute goods. It is a values statement: that your life and your labor and your property are your own, and that no one has the right to deprive you of those things without due process of law. It just so happens that this values system has also delivered the most prosperous era in the history of humanity, by several orders of magnitude.
The Left’s worldview rests on economic myths — myths about forcing the individual to heel to the collective. Those myths aren’t just damaging. They kill when implemented.
Myth 1: Socialism is morally preferable to capitalism.
Fact: Capitalism is morally preferable to socialism.
Bernie Sanders twice campaigned as a socialist and won over an entire contingent of young people. “Do they think I’m afraid of the word?” he told The Nation in 2015. “I’m not afraid of the word.”1 In open debate with Hillary Clinton, Sanders spewed, “Do I consider myself part of the casino capitalist process by which so few have so much and so many have so little? By which Wall Street greed and recklessness wrecked this economy? No, I don’t.”2
And young people loved it. A Harvard Institute of Politics poll in Spring 2016 found that Sanders was the only major party candidate with a net positive rating among 18 to 29-year-olds: 54 percent viewed him favorably, compared with just 31 percent viewing him unfavorably. That same poll showed only 42 percent of young Americans supported capitalism, with 33 percent saying they supported socialism. Full-scale socialism. Fully 50 percent of all Democratic voters said they favored socialism over capitalism.3
That poll isn’t an outlier. A 2014 Gallup poll found that 43 percent of young people said they favored socialism; 33 percent of people aged 30-49 liked it. Those who remember the Soviet Union well — those above age 65 — reject socialism wholesale, with just 16 percent favoring it.
Now, some of this is surely just ignorance. A Reason poll showed that while a large percentage of youngsters favored socialism (49 percent of college students said they liked socialism, while just 48 percent said they liked capitalism), most college students had no idea what socialism was. In fact, just 32 percent of millennials said they liked the idea of a government-managed economy, i.e. socialism.4
But ignorance hasn’t stopped Americans from embracing socialist candidates who pledge to stop income inequality and take down the nefarious One Percent. The Occupy Wall Street movement, with its tent cities attended by tens of thousands of Americans across the country, represented that ignorant socialist cohort on the grassroots level; meanwhile, pseudo-intellectuals in the media fawned over Thomas Piketty’s Capital in the Twenty-First Century, with Keynes devotees like New York Times columnist Paul Krugman labeling the book a “magnificent, sweeping meditation on inequality.”5 Columnists like Jesse Myerson of Rolling Stone even informed millennials that they ought to fight for government-guaranteed employment, a universal basic income, collectivization of private property, nationalization of private assets and public banks.6
This is idiotic.
Capitalism is the greatest single force for the empowerment of human beings in the history of mankind. Free markets defeated the global scourge of communism, which was responsible for the impoverishment of half of mankind and the murder of a hundred million people; free markets raised nearly the entire globe out of abject poverty.
So why is capitalism unpopular? Because all policies with concentrated benefits and diffuse victims are popular. Big government always benefits specific people in heavy measure, while small government benefits everyone in less tangible ways. If we tax everyone in the United States $0.01 and give all the money to one lucky American, that American walks away with $3 million. He’ll surely be grateful to the politician who made that happen. And most Americans won’t feel that one cent leave their pockets.
That’s why the conservative efficiency argument in favor of free markets tends to fail politically: those who are already employed think the system could be better, and those who aren’t want more government.
Back in 1998, shortly after the world seemed to reach a consensus on the ineffectiveness of socialist schemes, economists Daniel Yergin and Joseph Stanislaw wrote that the free market required something beyond mere success: It required “legitimacy.” But, said Yergin and Stanislaw, “a system that takes the pursuit of self-interest and profit as its guiding light does not necessarily satisfy the yearning in the human soul for belief and some higher meaning beyond materialism.” In other words, they wrote, while Spanish communists would die with the word “Stalin” on their lips, “few people would die with the words ‘free markets’ on their lips.” They added, “Even without that extreme contrast, the moral appeal of socialism and state intervention is clear and explicit: altruism; concern; sympathy, and solidarity with fellow humans; dignity and social betterment; justice and fairness; hope. The market system cannot offer such direct appeals.”7
The failure to make a moral case for capitalism has doomed capitalism to the status of a perennial backup plan. When people are desperate or wealthy, they turn to socialism; only when they have no other alternative do they embrace the free market. After all, lies about guaranteed security are far more seductive than lectures about personal responsibility. Arthur Brooks of American Enterprise Institute on this trend:
Today, we rarely hear a moral defense for free enterprise from our politicians. . . . And the general lack of moral defense explains why — despite the fact that surveys find a large majority of Americans think the government is too big and trying to do too much — we acquiesce to larger and larger government from both parties. Indeed, it is why government at all levels has grown from 15 percent of U.S. GDP in 1940 to more than 35 percent today, and — according to the Congressional Budget Office — will hit 50 percent in 2038.8
So what is the moral case for capitalism? It begins in recognition that socialism isn’t a great idea gone wrong — it’s an evil philosophy in action. It isn’t driven by altruism; it’s driven by greed and jealousy. Socialism states that you owe me something simply because I exist. Socialism violates at least three of the Ten Commandments: It turns government into God, it legalizes thievery, and it elevates covetousness. Discussions of income inequality, after all, aren’t about prosperity but about petty spite. Why should you care how much money I make, so long as you are happy?
Conservatives talk results when discussing the shortcomings of socialism. They’re right: Socialism is ineffective, destructive and stunting to the human spirit. But they’re wrong to abandon the field of morality when discussing the contrast between freedom and control. And it’s this abandonment — this perverse laziness — that has led to socialism’s comeback, even though within living memory, we have seen continental economies collapse and millions slaughtered in the name of this false god.
Conservatives must turn to the affirmative morality of capitalism. Capitalism is about the notion that you are not a slave. You own your own time, and you own your own labor, and you may do with it precisely what you wish. The miracle of capitalism is that such freedom doesn’t result in billions of artists finger-painting — it results in billions of people investing their time and effort into creating products for one another. Capitalism results in a sort of reality-forced altruism: I may not want to help you, I may dislike you, but if I don’t give you a product or service you want, I will starve. Voluntary exchange is more moral than forced redistribution. And voting to steal someone else’s money, even in the name of some greater equality, is forced redistribution.
Myth 2: Crony capitalism is capitalism.
Fact: Crony capitalism is economic fascism.
What today many politicians call “crony capitalism” — the collusion between government and private business in which certain businesses are given a leg up in return for complying with favored government policies — isn’t actually capitalism. It was originally called corporatism.
In essence, corporatism sees the economy like a human body, with various limbs and organs (hence its word-root: corp, Latin for body). Each limb and organ must work in concert with the others, lest it endanger the whole; each sector of the economy must work with the others to avoid conflict and create progress. Just as the body has a central planning mechanism — the brain — to control each of the parts, the economy requires a central planning mechanism — the state — to control each of the sectors of the economy. Just as the body cannot tolerate two muscles within the arm competing for control, so too must businesses within each sector be organized in accordance with proper function.
Corporatism isn’t socialism. In socialist countries, government owns the means of production, but in corporatist countries, government allows private industry to exist, so long as it works hand-in-glove with the government. In corporatist countries, the government both regulates and subsidizes the businesses it chooses within each particular sector. In brief, socialism is a fast killer of countries. Corporatism is slower. Corporatism locks industries in place, force-feeds them, and prematurely ages them.
Myth 3: Scandinavian socialist countries are thriving.
Fact: Scandinavian socialist countries are falling apart.
Private market economies plagued by high taxes and significant regulation are beginning to fall apart. While Bernie Sanders says “we should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people,” he misses the point: all those countries are ardently pro-free trade and rely heavily on the private market. Denmark is actually ranked above the United States in the Heritage Foundation index of economic freedom.9
Their recent slowdowns have been due to redistributionist welfare state safety net schemes. Sweden gained riches only after embracing capitalism in the mid-19th century; from 1975 to 1993, the country dropped from fourth in the world wealth rankings to 14th. Swedish scholar Nima Sanandaji called the country’s embrace of socialism a “colossal failure.” That’s why they had to liberalize their markets again. Denmark has had to scale back its welfare state; it turns out that most Danes don’t enjoy paying 60 percent income tax.10 The democratic socialistic European Union has begun to collapse completely, with drowning socialist-leaning nations like Greece dragging down neighbors and more capitalist countries like the United Kingdom breaking with the EU altogether.
Myth 4: Income inequality is immoral.
Fact: Income inequality can be good or bad.
The Left’s newest shtick is that income inequality is the worst of all possible ills. It’s immoral. It’s terrible. This is Marxist rhetoric at its finest: if we all had the same amount of money, we’d all be better off. But that’s mistaking a condition for a lack of morality.
Here’s the truth: income inequality is not moral or immoral. It just is.
Every country on earth has some level of income inequality. The question is how that income inequality is taking place. Everyone in Sudan is on relatively even footing — everybody is desperately poor. Does that make lives better? Or is it better to live in the United States, with much more relative income inequality, but where everybody is rich? In the United States, even the poor are rich, according to Pew Research, “almost nine-in-ten Americans had a standard of living that was above the global middle-income standard.”11
Want to know where the vast bulk of the poor people in the world live? In countries without free markets. The World Bank says that two-thirds of the global poor live in just five countries: India, China, Nigeria, Bangladesh, and Congo. And according to the Heritage Foundation Index of Economic Freedom, all of those countries rank 120th or below in terms of free markets. So don’t blame the United States for creating global income inequality. Blame the lack of free markets — especially since it’s the free markets that have lifted half of the world out of extreme global poverty.12
Wealth is generated in a free market by free and voluntary transactions that benefit both sides. If I make more off that transaction than you do, but it benefits both sides, is that increased inequality wrong? Or are we both better off? When I buy a loaf of bread from the supermarket, I’ve given them my money and they’ve made a profit; I’ve lost money. But does that mean they’ve impoverished me? Or am I better off than I would have been had I been forced to grow the grain, mill the flour, and bake the bread myself?
Myth 5: Income inequality is evidence of discrimination.
Fact: Income inequality exists everywhere, and isn’t evidence of discrimination per se.
Proponents of social justice are the leading antagonists of what they term “income inequality” — the gap between the highest earners and the lowest earners.
They treat “income inequality” as though such gaps have not widened and narrowed over time, or as if there is a correlation between levels of inequality of outcome and general success of the society or individuals within it. It’s quite possible for income inequality to grow while those at the bottom end of the scale get richer. In fact, that’s precisely what’s been happening in America: the middle class hasn’t dissipated, it’s bifurcated, with more Americans moving into the upper middle class over the past few decades. The upper middle class grew from 12 percent of Americans in 1979 to 30 percent as of 2014.13 As far as median income, myths of stagnating income are greatly exaggerated — as Edward Conard points out:
Misleading income measures assume tax returns — including pass-through tax entities — represent households. They exclude faster-growing healthcare and other nontaxed benefits. They fail to account for shrinking family sizes, where an increasing number of taxpayers file individual tax returns. They don’t separate retirees from workers. They ignore large demographic shifts that affect the distribution of income. Nor do they acknowledge that consumption is much more evenly distributed than income. More accurate measures show faster income growth, especially for non-Hispanic workers, and wage growth that parallels productivity growth.14
Proponents of “social justice” continue to maintain that the best way to curb inequity is by curbing inequality. They neglect to mention that social justice can only do so by destroying personal freedom, liberty, and the most powerful economy in the history of mankind. They also neglect to mention that American attempts to quash inequality have actually exacerbated it — we’ve now spent $22 trillion in the so-called war on poverty, to no avail,15 and we spend $30,000 per year on poor non-elderly families.16
Myth 6: Income mobility has declined markedly.
Fact: Income mobility has not declined.
President Obama joined Bernie Sanders in declaring “dangerous and growing inequality… the defining challenge of our time,” explaining that it “challenges the very essence of who we are as a people.” In one particularly egregious speech in December 2013, Obama declared that income mobility in the United States was essentially dead.17 Donald Trump has said the same thing. But income mobility hasn’t changed in the United States since the 1970s.18
And income inequality has no impact on income mobility, which is why American income mobility is just as strong as European countries with far more redistribution. Want to know why certain populations in America suffer from lack of income mobility? Because income mobility declines when you drop out of high school or have a baby out of wedlock.19
Myth 7: America has a serious poverty problem.
Fact: American poor people are wealthy by global standards.
As for poverty in America generally, the poor are the richest poor on earth: As Pew Research points out, “The US stands head and shoulders above the rest of the world. More than half (56%) of Americans were high income by the global standard… Another 32% were upper-middle income. In other words, almost nine-in-ten Americans had a standard of living that was above the global middle-income standard. Only 7 percent of people in the US were middle income, 3% were low income, and 2% were poor.”20
None of this is designed to argue that we don’t have a moral obligation as individuals to help the poor. But the leftist fascination with the notion that America is overrun with impoverished people is a lie – and it’s a lie specifically designed to castigate the system as a whole. America’s poor are prosperous because American society is prosperous – a rising tide truly does lift all boats, and free exchange of goods and services does benefit all of those who consent to such exchanges. To pretend otherwise is a calumny on the greatest system of wealth generation in human history.
Myth 8: Tax cuts to rich people are unfair.
Fact: Rich people pay all the taxes.
Each time Republicans talk about cutting taxes — and those who pay the most taxes are included in the conversation — Democrats and leftists immediately proclaim that tax cuts for the rich are unfair. They suggest that the rich are rigging the system for their own benefit and that the rich need to pay their “fair share.”
There are two problems with this.
First, the rich are already paying far more than their fair share. According to the Congressional Budget Office report on distribution of taxes in 2013, the top 1 percent of households paid 34 percent of their income to federal taxes; the middle 20 percent paid just 12.8 percent.21
The top quintile of income households paid an average of $57,700 into federal tax coffers in 2013 when you include any wealth transfers they were paid by the government; the fourth highest quintile paid $2,600; the middle quintile actually made $7,800 from the feds, the second lowest quintile made $12,200, and the lowest quintile made $8,800.
Bottom line, according to the American Enterprise Institute: “the highest income quintile is financing 96% of the entire system of transfer payments to the bottom 60% AND funding the operation of the federal government.”
So no, the rich aren’t undertaxed. They’re paying for the whole damn operation. We actually have “the most progressive federal tax system among all OECD-24 countries.”22
Myth 9: The top 1% keep getting richer.
Fact: Lots of different people move in and out of the top 1%.
You’ve undoubtedly heard the myth that the top 1 percent of wealth owners keep getting richer and richer, while the bottom of the income distribution keeps getting poorer and poorer. That suggests that there is a fixed number of individuals in the top 1 percent who are rigging the system to their own benefit. That’s patently untrue.
Here’s the truth: lots of people move in and out of the top 1 percent. There is a solid shot that at some point in your life, you may be in the top 1 percent; there’s a solid shot that you won’t be in that top 1 percent for an extended period of time. That’s not a result of discrimination. That’s because you earn different amounts of money as you age, as you change jobs, and as you make different life decisions. For example, as Thomas Sowell points out, “Households headed by someone 65 years and older have more than 15 times as much wealth as households headed by someone under 35 years of age…. Everybody who is 65 years old was once under 35 years of age.”
So, where is this evil cabal of rich people sucking up all the wealth? Nowhere. Income brackets may diverge, but the people in them aren’t constant. For example, for those in the top 1 percent in 1996, incomes decreased by 26 percent by 2005. In other words, those people largely dropped out of the top 1 percent. Again, here’s Sowell: “A University of Michigan study showed that most of the working people who were in the bottom 20 percent of income earners in 1975 were also in the top 40 percent at some point by 1991. Only 5 percent of those in the bottom quintile in 1975 were still there in 1991, while 29 percent of them were now in the top quintile.”23
Myth 10: Government spending boosts the economy.
Fact: Government spending boosts the debt and taxes.
One of the great myths perpetuated by commentators and politicians of the Left is the Keynesian fallacy that if the government borrows or taxes money away from earners, then hands that money to government to spend on government-sponsored projects, this leads to economic growth. First off, it didn’t happen that way during the greatest public works time in American history, the Great Depression. Second, the basic logic is flawed. If I steal a dollar from you, use it to buy a pencil, and the person who sold me the pencil uses the dollar to buy a candy bar from you, what has been produced? Nothing — and you’ve lost a dollar, since you still had to part with a good worth a dollar in order to get your dollar back. The goods and services have merely changed hands, but nothing of additional value has been produced; you could have taken that dollar and bought a pencil or a candy bar yourself, if you wanted it.
Yet John Maynard Keynes believed that this “multiplier effect” made the economy go round. He believed that the government’s seizure of wealth from some in order to spend it on its own priorities would somehow boost the economy — even though the government is inefficient, does not have to answer for its misspent dollars, and blows money on stupid boondoggles.
In reality, the government multiplier effect is a myth. It says that savings is bad for the economy, while spending is good, since demand is what drives the economy. But savings is necessary to an economy, not only because it allows lending via the banks that store savings, but also because savings allows spending — if you have no money saved, how exactly do you plan to spend, other than by confiscating wealth, or borrowing wealth without a plan to pay it back? The Keynesian theory that it helps the economy to increase “demand” without actually producing goods or services to pay for that demand is sheer sophistry.
Here’s a brief history of the failure of Keynesian economics, courtesy Heritage Foundation:
During the 1930s, New Deal lawmakers doubled federal spending — yet unemployment remained above 20 percent until World War II. Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world) — yet its economy remained stagnant. In 2001, President Bush responded to a recession by ‘injecting’ tax rebates into the economy. The economy did not respond until two years later, when tax rate reductions were implemented. In 2008, President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen.24
Myth 11: Minimum wage helps the economy.
Fact: Minimum wage kills jobs.
In 2015, leftists across America rallied for a $15 minimum wage. They picked the number out of a hat — nobody could explain just why a $15 minimum wage was the right number, but it sounded nice and round, and so they went for it. They claimed that this new minimum wage would not endanger jobs — employers were simply making too large a profit margin, and therefore could skimp a bit and still afford to pay their employees the inflated wages.
There’s just one problem with this theory: it’s utterly untrue.
Employers typically do not cut their profit margins in order to pay higher salaries for low-level employees. They simply fire low-level employees in order to make the budget work. As economics professor David Neumark writes in The Wall Street Journal, “Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled…. An extensive survey of decades of minimum-wage research, published by William Wascher of the Federal Reserve Board and me in a 2008 book titled ‘Minimum Wages,’ generally found a 1% or 2% reduction for teenage or very low-skill employment for each 10% minimum-wage increase.”25
Additional costs imposed on employers cuts the prospect for maintaining as many employees. It is that simple. And it gets even simpler: if the price of labor is artificially increased, employers turn to technology to fill the gap. Thus we’ve seen order kiosks pop up at restaurants around America. We’ve seen union jobs in manufacturing replaced by machines. Any policy that increases labor cost beyond the cost of machinery causes loss of jobs in that industry.
- Michael Kruse, “4 Things Bernie Sanders has said about socialism,” Politico.com, July 17, 2015 http://www.politico.com/story/2015/07/14-things-bernie-sanders-has-said-about-socialism-120265
- Tessa Berenson, “Hillary Clinton and Bernie Sanders Spar Over Capitalism in First Debate,” Time.com, October 13, 2015 http://time.com/4072583/democratic-debate-hillary-clinton-bernie-sanders-capitalism/
- “Harvard IOP Spring 2016 Poll,” Harvard.edu, Spring 2016 http://iop.harvard.edu/youth-poll/harvard-iop-spring-2016-poll
- Emily Ekins, “Millennials Don’t Know What ‘Socialism’ Means,” Reason.com, July 16, 2014 http://reason.com/poll/2014/07/16/millennials-dont-know-what-socialism-mea
- Ronald Bailey, “Jonah Goldberg’s Excellent Take-Down of Piketty’s Capital in the Twenty-First Century,” Reason.com, June 24, 2014 http://reason.com/blog/2014/06/24/jonah-goldberg-excellent-take-down-of-pi
- Jesse A. Myerson, “Five Economic Reforms Millennials Should Be Fighting For,” RollingStone.com, January 3, 2014 http://www.rollingstone.com/politics/news/five-economic-reforms-millennials-should-be-fighting-for-20140103
- Daniel Yergin, Joseph Stanislaw, The Commanding Heights (Simon & Schuster: New York, 1998).
- Arthur C. Brooks, “Making a moral case for capitalism,” AEI.org, October 21, 2012 http://www.aei.org/publication/making-a-moral-case-for-capitalism/
- Rich Lowry, “Sorry, Bernie – Scandinavia is no socialist paradise after all,” NYPost.com, October 19, 2015 http://nypost.com/2015/10/19/sorry-bernie-scandinavia-is-no-socialist-paradise-after-all/
- Jeff Jacoby, “No, Bernie Sanders, Scandinavia is not a socialist paradise,” BostonGlobe.com, October 15, 2015 https://www.bostonglobe.com/opinion/2015/10/15/bernie-sanders-scandinavia-not-socialist-utopia/lUk9N7dZotJRbvn8PosoIN/story.html
- Ben Shapiro, “Leftists Keep Saying The Richest People Are Wealthier Than Billions Of Other People Combined. Here’s Why That’s A Stupid Talking Point,” DailyWire.com, January 16, 2017 http://www.dailywire.com/news/12451/leftists-keep-saying-richest-people-are-wealthier-ben-shapiro
- Ben Shapiro, “Leftists Keep Saying The Richest People Are Wealthier Than Billions Of Other People Combined. Here’s Why That’s A Stupid Talking Point,” DailyWire.com, January 16, 2017 http://www.dailywire.com/news/12451/leftists-keep-saying-richest-people-are-wealthier-ben-shapiro
- Josh Zumbrun, “Not Just The 1%: The Upper Middle Class Is Larger And Richer Than Ever,” WSJ.com, June 21, 2016 http://blogs.wsj.com/economics/2016/06/21/not-just-the-1-the-upper-middle-class-is-larger-and-richer-than-ever/
- Edward Conard, The Upside of Inequality (Portfolio/Penguin: New York, NY, 2016), 165-166
- Robert Rector and Rachel Sheffield, “The War on Poverty After 50 Years,” Heritage.org, September 15, 2014 http://www.heritage.org/research/reports/2014/09/the-war-on-poverty-after-50-years
- Edward Conard, The Upside of Inequality (Portfolio/Penguin: New York, NY, 2016), 204
- “Remarks by the President on Economic Mobility,” WhiteHouse.gov, December 4, 2013 https://www.whitehouse.gov/the-press-office/2013/12/04/remarks-president-economic-mobility
- “Mobility, measured,” Economist.com, February 1, 2014 http://www.economist.com/news/united-states/21595437-america-no-less-socially-mobile-it-was-generation-ago-mobility-measured
- Ibid, 179-185.
- Rakesh Kochhar, “How Americans compare with the global middle class,” PewResearch.org, July 9, 2015 http://www.pewresearch.org/fact-tank/2015/07/09/how-americans-compare-with-the-global-middle-class/
- Scott Greenberg, “Are the Rich Paying Their Fair Share Yet?,” TaxFoundation.org, June 10, 2016 https://taxfoundation.org/are-rich-paying-their-fair-share-yet/
- Mark J. Perry, “CBO study shows that ‘the rich’ don’t just pay a ‘fair share’ of federal taxes, they pay almost everybody’s share,” AEI.org, June 13, 2016 http://www.aei.org/publication/cbo-study-shows-that-the-rich-dont-just-pay-a-fair-share-of-federal-taxes-they-pay-almost-everybodys-share/
- Thomas Sowell, “Who’s in the Top 1 Percent?,” NationalReview.com, November 8, 2011 http://www.nationalreview.com/article/282503/whos-top-1-percent-thomas-sowell
- “Why Government Spending Does Not Stimulate Economic Growth: Answering The Critics,” Heritage.org, January 5, 2010 http://www.heritage.org/budget-and-spending/report/why-government-spending-does-not-stimulate-economic-growth-answering-the
- David Neumark, “The Evidence Is Piling Up That Higher Minimum Wages Kill Jobs,” The Wall Street Journal, December 15, 2015 https://www.wsj.com/articles/the-evidence-is-piling-up-that-higher-minimum-wages-kill-jobs-1450220824