"Capitalism - Mobility, not Equality"

Sydney M. Williams

swtotd.blogspot.com

Thought of the Day 

“Capitalism – Mobility, not Equality”

May 6, 2019

“The inherent vice of capitalism is the unequal sharing of blessings.

The inherent virtue of Socialism is the equal sharing of misery.”

                                                                                                Winston Churchill (1874-1965)

                                                                                                In Parliament, October 1948

Capitalism is under attack. Democrats are fearful that their comfortable Washington lives may become subject to an investigation now that the Mueller investigation expired without a crime. The best defense, it is said, is a good offense, and that is the strategy being pursued by Democrats. One such attack is a renewed focus on income and wealth disparities – the “inherent vice”of capitalism, as Churchill noted. Doing so justifies their predilection for income redistribution. Inequality has become falsely synonymous with capitalism. Even some on the right have become fearful of defending capitalism. No one denies that income and wealth gaps exist. But, are today’s unusual? Most important, do they interfere with social and economic mobility? 

While our two fundamental documents, the Declaration of Independence and the Constitution say we are created equal and are provided equality under the law, neither says anything about equality of outcomes. The French, though, did in 1789, and they got a reign of terror, the dictatorship of Napoleon and a restoration of the Bourbons, before, eventually, falling into democracy. The Russian Revolution was supposed to bring equality, but it brought one of the harshest governments to which man has ever been subjected, and the Country remains unfree, with inequality higher than in western democracies. Inequality is the natural state of man. You are taller and better looking than me. My imagination may be more fertile, but you are willing and able to work harder. You have ambition; I am satisfied with the status quo. It is not the purpose of liberal societies to effect equal outcomes. Government should help ameliorate capitalism’s worst aspects of inequality, but to kill the goose today is to eliminate the prospect of eggs tomorrow. Equality of outcomes is only a promise of authoritarian regimes. The purpose of a fair and liberal society is to provide equal opportunities and to ease social and economic mobility – principally through education – by which the aspirant and talented can achieve success, whatever their backgrounds. 

Capitalism can only survive within the context of freedom – freedom from unnecessary and unreasonable regulation; freedom to operate under the rule of law, yet within its constraints; freedom to own, buy and sell property in free markets. It is not coincidental that the industrial revolution coincided with political liberalization. We can argue as to which came first, but together they unleashed unprecedented economic growth, which has done more to eradicate poverty than any other system. 

Certainly, capitalism has abuses, but should an alien have looked at the world in the late 18^thCentury, then again in the late 19^thCentury, the changes he would have seen would have been astonishing – steam power, the telegraph, electric batteries, telephones, railroads, photography and autos – products and services that benefitted all people. Changes have been more dramatic since. Creative minds and a willingness to take risk are necessary ingredients for individual and societal advancement. Capitalism is at its heart. 

Joseph Schumpeter taught us that creative destruction is a natural consequence of advances in technology. Old jobs are lost, and new ones gained, but transitions are never smooth. Life is a continuing and changing process. It is the reason why a fundamental education is critical. Our lives are different from those of our parents and grandparents. Our children and grandchildren will enjoy products and services we cannot even imagine. As technology advances, and industry and services change, so must government and the regulatory bodies we rely on. Government must play a role but should not create dependency. People must be free to experiment and take risk, for it is from them that new products and services arise.

Capitalism is, and always will be, a work in process. It is not broken. It is the wave of multiculturalism and its accompanying stepchildren – identity politics, political correctness and relativism – that have shaken the foundation of free markets. Capitalism requires an independent and innovative spirit, not one harnessed by dependency on the state or tied to forces we are fearful of offending. Whether it was political malice or ignorance, something prompted the 29-year-old Congresswoman from New York Alexandria Ocasio-Cortez to tell a Timereporter last month: “An entire generation, which is now one of the largest electorates in America, came of age and never saw American prosperity. I have never seen that, or experienced it, really, in my adult life.” Was she serious? Did she compare her upbringing to those in other nations, especially those in Socialist countries she admires? Does she not realize that the “Greatest Generation,” those who went to war seventy-eight years ago – with over 400,000 giving their lives – were children and young adults during ten years of Depression? An 18-year-old soldier in 1942 was five years old in 1929 when the stock market crashed, and a depression descended. That was the generation that never saw prosperity as children. 

As this debate rages through the millennial classes, perspective is wanted. Income and wealth disparities are indeed wide, but we should consider the past. Both measurements were greater in the late 19^th and early 20^th Centuries. The Depression and the Second World War acted as levelers. The 1950s was a time of rebuilding incomes and wealth lost over the prior decade and half. Private sector unions ensured that working Americans, especially those in manufacturing and basic industries, were paid good wages. Combined with exceptionally high tax rates on very high earners, those factors assured more egalitarianism in terms of incomes. A stock market that took twenty-four years to recover meant that wealth, too, was more equal. But, do we want to undergo a ten-year Depression and a world war to again achieve the equality we saw then? And, keep in mind, those years of recovery – the 1950s and ‘60s – culminated in the 1970s, a decade of high inflation, weak economic growth and a stagnant stock market.

As well, it should be remembered that it is common, at least in the United States, for those who have achieved extraordinary financial success to give back much of what they have reaped. Their generosity can be seen in our schools, universities, hospitals libraries and museums. We see their names attached to foundations established to help the less fortunate at home and abroad. Without them, the burden on taxpayers would be higher and the quality of our lives would be lower – less art, less music and less theater.

In the late 1990s income inequality peaked, due to the proliferation of option-grants during a decade in which the stock market saw its sharpest increase in history – a heady, technology-driven market that ended in a three-year bear market. Option grants, of little value in a bear market, have been largely discontinued. The credit crisis of 2007-2008, a crisis for which government deserves as much blame as banks, caused a big decline in stocks and a sharp, 18-month recession. The anemic economic recovery that followed did not lift all boats equally. Yachts rose but skiffs stayed moored on a sandbar of dismal economic growth. Unemployment declined, but workforce participation rates remained low, and wage growth for low-and-middle income earners was negligible. Persistent low interest rates helped boost stock prices to record levels. Wealth and income gaps widened during the Obama years.

Recent increases in wage growth and in total employment, especially among low-and-middle income earners,are helping the income situation. Stocks have continued to rise, though have been essentially flat for six months. While income and wealth gaps are wide, they remain substantially below where they were a hundred years ago. Nevertheless, a Pew Research survey taken last fall speaks to disparities that were higher in 2016 than forty-five years earlier. The size of the middle class declined from 61% of households to 52%, between 1971 and 2016. Lower income households increased from 25% to 29%, while upper income households increased from 14% to 19%, indicating that the principal effect has been greater polarization. There was virtually no change in those numbers during the Obama years. It remains to be seen whether Mr. Trump’s policies of reducing taxes and easing regulation will increase the middle class. Early indications, however, are positive. Annualized GDP growth, during Mr. Trump’s first two years, is fifty percent higher than during Mr. Obama’s eight years – three percent versus two percent. Unemployment is down, workforce participation has increased, and we have seen the best wage growth in a decade. 

Three steps can lead to reduced inequality: Simplify the tax code – complexity benefits the wealthy and multinational corporations. A flat tax would be best, or, at least, as flat as possible.  Second, reduce regulation to the extent possible. I am not a fan of regulations but recognize their importance. John Adams got it right: “…the invisible hand of the market place required the visible hand of government to regulate its inevitable excesses.”[1]But regulations should not be used to empower federal bureaucracies. And third, and most important, expand school choice. Admittedly this means taking on powerful teachers’ unions, but our children are worth it. More should be done with charter schools and voucher programs; for it is only through competitive education options for those in public schools that we can invigorate aspiration, foment respect for others, encourage a willingness to work hard and provide the knowledge necessary to succeed. Wealthy families have the option of expensive private schools. Middle-income and low-income families do not. We should not plow the snow for our children, but we do need to give them the tools to clear the road ahead.

As the fortunate citizens of this great nation, we have equal rights, but we are in no way equal, nor can we ever be. When luck is dispensed it is not done so evenly, any more than is talent, ambition or a work ethic. We should never forget that free market capitalism has done more to reduce poverty and raise living standards than any other system yet devised. Since equality of outcomes is an impossible dream, we should assure that social and economic mobility continue attainable. It has been in the past and is today, as can be seen by the flocks of billionaires from Silicon Valley and Wall Street. Mobility is a two-way street. My own history is exhibit ‘A.’ Three of my four sets of great-grandparents were part of the 19^thCentury’s “Gilded Age.” But time, a few bad decisions and the generational multiplier took their toll. I was raised in a fashion quite different even from my artist parents. We were nine children in a four-bedroom, two-bath New Hampshire farmhouse, with no central heat. Yet, we survived happily.  

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[1]As quoted by Joseph Ellis in his new history, American Dialogue: The Founders and Us.