Wednesday, July 18, 2007

A Case in Point

I wrote yesterday about the arrogance that underlies the redistributive urge:
It is liberals who empower the state to dictate the redistribution of income, even though redistribution is a violation of the very autonomy that liberals claim to value. Liberals are willing and ready to draw arbitrary lines between those who (in their view) deserve more income and those who deserve less of it. And liberals are more than willing and ready to use the power of the state to enforce their arbitrariness.

By the same token, liberals are unwilling to allow free institutions to determine who fares well and who fares poorly. And their unwillingness to do so undermines the ability of those free institutions to enable the "cold/sick/hungry/stupid/isolated" to better their lot by their own efforts, and to care for those who are unable to do so.

My only regret is the exclusive use of "liberals." The arrogant attitude that "no one deserves to be so rich" extends beyond liberals. A good case in point is Sen. Chuck Grassley (R-IA). According to an article in the current issue of Newsweek, Grassley
has a profound frustration with superrich businesses and corporations that do not pay their fair share of taxes. Now the senior senator from Iowa is fighting to eliminate what he sees as a giant tax loophole by co-sponsoring legislation that would raise the tax rates (from 15 to 35 percent) on publicly traded partnerships like the private-equity giant Blackstone. To Grassley, the bill would help prevent ultrarich financiers from conspiring with their lawyers to "screw the taxpayer." To his opponents, it’s a wrong-headed means of stunting economic growth.
Wrong-headed is right. (See below for a sample of the consequences of "soaking" the "super rich.")

The Newsweek piece about Grassley is a sidebar to another article in the same issue of Newsweek, namely, "Taxing the Super Rich." From the lede:
In Wall Street's pecking order the partners in private-equity firms are the true aristocrats...Global in reach, able to marshal billions to buy big companies...Private-equity partners are not just in it for the money (though the successful ones make tons of it), but for the power to reshape whole industries. Unlike corporate CEOs, who are shackled by the short-term focus of shareholders, private-equity managers can swoop in and transform a troubled industry to create efficiency and growth. [Emphasis added: ED]
But that isn't enough for the class-warfare crowd. Returning to the article:
Ever since the rise of the populists in the late 1800s, lawmakers have periodically threatened to soak the rich. Usually, these movements fizzle, partly because Americans hope that they, too, might one day become rich, and partly because there are good economic arguments against discouraging investment and the accumulation of wealth. But from time to time comes a tipping point. In the early 20th century, the Progressive Movement managed to impose a federal income tax, partly in reaction to the vast fortunes made during the late-19th-century Gilded Age.
Those vast fortunes were made because those who made them were responsible for the rapid economic growth of the late 1800s. Productivity rose so rapidly during that era that prices fell, even as the economy grew.

As for the fruits of the Progressive Movement -- which imposed a federal income tax and punitive anti-trust and regulatory policies -- read this, in which I point out:
  • Had the economy continued to grow at the rate of 1790-1907 (the era of laissez-faire, more or less), real GDP in 2035 would be $107 trillion (in year 2000 dollars).
  • If the economy continues to grow at the rate of 1970-2005 (the era of entrenched big government), real GDP in 2035 will be $27 trillion (in year 2000 dollars).
  • Thus the average American will "enjoy" about one-fourth the real output that would be his absent big government.
We owe the sharp drop in economic growth after 1907 to the Progressive Movement. The great-grandchildren of last century's "progressives" haven't seen enough. In their ignorance and arrogance, the wish to redouble our economic pain by "soaking" the "super rich" whose efforts -- as even Newsweek admits -- create efficiency and growth.

Related post: More Commandments of Economics (see #13)