Our Everyone Gets a Trophy Economy
“The ultimate result of shielding men from the effects of folly is to fill the world with fools." - Herbert Spencer
Any conversation with parents of school-aged children often turns to activities in the classroom and on the field. In U.S. schools today there’s a concerted effort afoot to make everyone as equal as possible. While various affirmative action programs have been around for decades to compensate for unequal abilities, in school seemingly no one loses anymore.
Compassionate school administrators have apparently prevailed. Many children are especially sensitive to perceived slights and failures, and rather than force kids to compete, today’s schools often make sure that everyone gets a trophy.
The same unfortunate mindset meant to shield children from reality has polluted U.S. economic policy. Rather than expose Americans to the very failures that teach us how to succeed, politicians are devising more and more ways meant to protect us from failure. And, they pass laws that keep others from succeeding so those who are not rich don’t feel bad.
Taxation. Start with the presidential candidates, John McCain and Barack Obama. When McCain was asked in a November 2005 Wall Street Journal interview about his opposition to the 2003 income and capital gains cuts, he didn’t oppose them on economic grounds. Instead, he felt they were “too tilted to the wealthy and I still do.” Asked to clarify his position, McCain explained, “We have a wealth gap in this country, and that worries me.”
In April of this year, ABC’s Charles Gibson asked Barack Obama about capital gains taxes, specifically why he would seek to raise them at all “given the fact that 100 million people in this country own stock and would be affected?” Obama’s response paralleled McCain’s in that he would like higher taxes on capital formation “for purposes of fairness.”
When it comes to taxes in general, Barack Obama has made it plain that he would raise the tax rate on the highest earners, while John McCain comforts his supporters with a promise that he would penalize the earnings of the rich at a lower rate. Both candidates miss the disincentivizing nature of taxation.
Realistically, taxes should be seen as a price or a penalty against effort. This is important because no matter how many times politicians tell us they’ll stimulate the economy through income redistribution, the fact remains that economic growth is always and everywhere a function of productive work effort. Or, as Andrew Mellon (Treasury secretary under presidents Harding, Coolidge and Hoover) noted in Taxation: The People’s Business: “when a man’s initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”
Both Obama and McCain miss Mellon’s point because in quibbling over the correct rate for the most productive taxpayers, they’re advocating that success should be penalized at a higher rate than lack of success. That the vital, productive few create enormous opportunities for every American seems to concern neither.
Obama also embraces the notion of an earned income tax credit (first floated by free-market hero Milton Friedman) whereby those whose economic production is low will not only escape tax, but be rewarded with a rebate from the government funded on the backs of the more productive among us.
The message from our federal minders couldn’t be clearer: if you succeed your reward will be higher taxation; and if you fail, government will embrace your failure through subsidies that reward a lack of productivity. In short, the broad economic message of both political parties retards economic growth by penalizing the productive in order to coddle those who aren’t. Everyone gets a trophy whether it is deserved or not.
The pursuit of happiness. Some say that financial wealth is but one measure of success, and that it is misleading to measure success in terms of one’s bank statement. At first blush this might make some sense, but only briefly.
To the extent that many Americans choose the arts, academia or nonprofits as their path to happiness, it must be understood why they’re able to follow their passions. Indeed, behind nearly every artist is a wealthy patron whose success has enabled the painter to paint. One need only visit the various museums on New York City’s Fifth Avenue to see that commercial success (see New York’s Frick, or the board of directors for the Museum of Modern Art) is what makes the pursuit of a career in art possible.
While university teaching is often hostile to wealth creation, it’s safe to say that a great deal less would exist (see the names on the buildings at Harvard, Stanford and University of Chicago to name a few) absent the eleemosynary nature of the rich. When Joseph Schumpeter wrote in Capitalism, Socialism and Democracy that capitalism’s “very success undermines the social institutions which protect it,” he doubtless had academia in mind.
The economy’s success also governs the work of charitable organizations. In 2007, charitable donations from Americans hit a record of $300 billion. But a recent newspaper headline noted that “Nonprofits Brace for Slowdown in Giving”. Sure enough, nonprofits frequently only exist thanks to the generosity of the rich. And with the rich in many cases hurting in this uncertain economic climate, the ability of charitable organizations to continue their missions will be severely compromised.
So when it is said that the rich must give back, or that they must be taxed at a higher rate for the “greater good”, those not rich should remind themselves why they get a “trophy” despite pursuing work that has little to do with wealth creation. Rather than greedy misanthropes, the rich are society’s benefactors. Those who countenance their penalization will also pay the price.
Bailouts. As is well known now, weak-dollar mischief this decade (meant to aid ailing manufacturers) has distorted investment in favor of the “real” while fostering an investment slowdown. The bill for bad policy from Washington has in the past year brought such harm to financial institutions that many believe we’re in the midst of the worst financial crisis since the Great Depression.
Sadly, much as in the ’30s, rather than allow the prices of houses, banks and the underlying securities on bank balance sheets to reach market-clearing levels, the federal government has inserted various new rules along with taxpayer money to soften the pain. Even if we ignore the fallacious assumption that money taken from the private economy can be profitably put back in, we should at least question this “everyone gets a trophy” philosophy that says no one can fail.
Homeowners are already subsidized by preferential capital gains treatment, tax-deductible interest payments and government-funded mortgage securitization. Treasury Secretary Paulson has now asked lenders to “voluntarily” rewrite mortgage contracts, while instituting an 800 helpline to the federal government for those fearful of defaulting on payments. During the last presidential debate, McCain, presumably seeking the votes of the irresponsible, said if elected that he would "order the secretary of the Treasury to immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes." The nationalization of Fannie Mae and Freddie Mac was, among other reasons, done so that the federal government could more aggressively step into the housing market with taxpayer dollars.
So while 95 percent of homeowners are still making their house payments on time, the government is subsidizing many who borrowed money that they won’t be able to pay back. The tax dollars of Americans who waited out this decade’s property boom in hopes of buying amid any downswing are spent to prop up the value of homes purchased by the irresponsible.
Short-selling. Short-selling of shares is a risky, but essential, market process whereby negative sentiment is introduced into the stock prices of publicly traded companies. But with various financial firms apparently unhappy with investor opinions of late, the SEC recently banned short sales of 799 firms supposedly harmed by those bears.
Investors had grown accustomed to parking their cash with money-market funds, but after holdings of Lehman Brothers debt led to a “breaking of the buck” in the Reserve Fund, the Treasury announced a $50 billion dollar bailout of money-market firms. The money for this will come from Treasury’s exchange-stabilization fund. Somewhat ironically, the money that Treasury could have used throughout this decade to resist the dollar’s decline will be used to stabilize the very funds harmed by Treasury’s weak-dollar policies.
And with financial institutions still in trouble thanks to bad investments on their books, Treasury Secretary Paulson pushed a $700b bailout plan through Congress meant to buy non-performing assets from struggling financial institutions. Implicit here is the assumption that the federal government has a hotline to the future that private investors lack. Instead of reducing corporate taxes and other penalties on business success, the government once again coddles business mistakes rather than rewarding achievement.
Absent a policy climate that rewards economic failure and irresponsibility, much of what vexes us now would not, or at the very least would be far more contained. But thanks to a political class that believes everyone deserves a trophy, we’ll never know what private economic actors might have done minus the presence of a money-wielding government. Whatever the ultimate result, the bailouts retard the process whereby devalued assets get into the hands of intrepid investors who possess huge incentives to make that which is hurting thrive.
Worse, the bailout culture will cruelly blind most Americans to the lessons learned through failure that very necessarily tell them how to achieve. Indeed, without failure, there cannot be success. So while everyone will perhaps get a trophy from the “benevolent” hand of Washington, it will be at the expense of long-term health and wealth for all.