The Skeptical Optimist

Robber Barons, or Robin Hoods?

I'm back from a long, mostly rainy weekend in Manhattan, where I spent a good bit of time over lunches and dinners with several people who, until now, had been internet acquaintances.  Two are bloggers; one of them I "met" via the keyboard more than ten years ago; he is now one of the astute commenters here (one of the many, of course).  For quite a while, by the way, I've been noticing that these internet acquaintances of mine think a lot like I do (...or maybe it's the other way around ...and maybe the arrow of causation points towards me in each case.)  Whichever it is, it was way past time for me to meet with each of them and have an old fashioned face-to-face conversation at a comfortable restraurant—a mode of communication with which the internet cannot yet compete, and maybe never will.  [If you have any internet acquaintances like that, I recommend meeting with them whenever your travel schedule permits; it's a good way to remind everyone involved that there are real people behind those keyboards; meeting them in person almost always beats "internet anonymity."]

Between those meetings of mine, the four of us who made the trip were able to squeeze in a few museum visits.  One imperative was the Frick Collection.  Henry Clay Frick made his fortune in the late 1800's supplying coke to Andrew Carnegie's steelmaking operations, and he bequeathed a portion of it—his art collection—to the public.  His sincere hope was that the public would get half the enjoyment out of it that he had.   Anyway,  I got a chuckle out of the way the Moon Metro guide to New York City worked their apparent political bias into their description of "The Frick Collection":

Like many of New York's cultural institutions, the Frick owes its creation to a wealthy robber baron hoping to whitewash questionable behavior with a hefty endowment to the arts.

"Robber baron"?  The class warfare rhetoric is even infecting our tour guidebooks, for cryin' out loud. 

Robin Hoods, not Robber Barons
The so-called robber barons included (among others) Frick, Andrew Carnegie, John D. Rockefeller, J.P. Morgan, and Henry Ford: steel, steel, oil, finance, and cars, respectively.  Each of those "robber barons" spent decades risking their money and sacrificing their personal lives to turn what had been high-priced, low-quality products and services, affordable only to the rich, into a high-quality, low-priced products and services affordable to the masses.  Both the "robber barons" and the masses knew, intuitively at least, that lower prices for higher quality products and services improve one's standard of living.  The masses liked their improving standard of living so much that they voted (with their dollars) to reward the "robber barons" handsomely—by purchasing their products and services in huge quantities. 

So, that begs the question: From whom were the "robber barons" robbing?  In every case, their products and services improved in quality and dropped in price, decade after decade, thereby gaining millions and millions of customers.  In most if not all cases, they gave away a substantial portion of the wealth awarded to them by those millions of customers they'd served. 

If the "robber barons" had robbed anyone, it was the lazy, idle, complacent rich who didn't care whether the middle class or the poor could afford to travel, or to buy a car.  The "robber barons" robbed the rich of their exclusive claim on the luxury of transportation—thereby turning millions of non-rich into loyal customers.  That's why they sound more like "Robin Hoods" to me: they robbed exclusivity in luxuries from the rich, and offered those luxuries at lower and lower prices to the non-rich—millions and millions of whom took them up on that offer.  The customer base for luxuries became orders of magnitude more diverse and inclusive.  Why aren't the so-called robber barons getting any praise from today's diversity-and-inclusion industry for what they did?  Sheesh, they practically invented the concept—before we even knew what to call it.

They weren't Robber Barons, they were Robin Hoods.  "Robber Barons" must have been a tragic typo that somehow slipped past the editors, then caught on with partisan headline writers forever afterwards.  That's my theory, anyway; I adopted it from those who taught me that America's super rich got that way mostly by making better products while incessantly reducing the prices of those products.  Obviously, both wages and prices play a big part in anyone's standard of living (...just ask anyone who buys gasoline today); by giving everyone price cut after price cut, the so-called robber barons were in effect giving everyone wage hike after wage hike.  Sam Walton and Bill Gates subsequently learned that lesson well; they got super-rich by employing essentially the same process. 

And now that I've clarified all this, how long do you think it will take Moon Metro to fix their description of The Frick Collection?

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End note:
Commenters who disagree with me will probably want to start by mentioning the Homestead strike, a pivotal event on the learning curve for all parties that were involved. 

FQ.07.43: Favorite Quote for This Week

Throughout history orators and poets have extolled liberty, but no one has told us why liberty is so important.  Our attitude towards such matters should depend on whether we consider civilization as fixed or as advancing. . . In an advancing society, any restriction on liberty reduces the number of things tried and so reduces the rate of progress.  In such a society freedom of action is granted to the individual, not because it gives him greater satisfaction but because, if allowed to go his own way, he will on the average serve the rest of us better than under any orders we know how to give. 
—H. B. Phillips

Hayek's warning: The convenient enemy

Last week I figured it was time to reread The Road to Serfdom by F.A. Hayek, after letting it sit on the bookshelf for ten years.  It now has several more underlined passages; it gains a few of those each time. 

It strikes me that one of those newly-underlined passages could easily have been Hayek's warning about today's political debate—if it hadn't been for two or three telltale words that give away how long ago he wrote it (60 years).  Here's the passage:

It seems to be almost a law of human nature that it is easier for people to agree on a negative program—on the hatred of an enemy, on the envy of those better off—than on any positive task... It is consequently always employed by those who seek, not merely support of a policy, but the unreserved allegiance of huge masses... The enemy, whether he be internal, like the "Jew" or the "kulak," or external, seems to be an indispensable requisite in the armory of a totalitarian leader.

Just replace "the 'Jew' or the 'kulak'" with "the 'rich,' the 'immigrant,' the 'national debt,' or the 'corporation'" to bring Hayek's warning sixty years forward, right up into the twenty-first century.  (Of course, it would also be necessary to replace "a totalitarian leader" with "most presidential candidates.")  The convenient enemy is a timeless tool.   

And fifty years from now, I bet we'll be able to modernize it the same way: by changing just a few words.   

The falling dollar: Bad news, or good news?

When the dollar rises, imports become more affordable to us, and the trade deficit tends to increase.  When the dollar falls, exports tend to rise; that helps create jobs here, and boosts GDP.  So, is a falling dollar bad news, or good news?

Here's the latest version of the trade-weighted dollar chart; the dollar is almost back down to its 1987 1997 level.  (Exports, by the way, are behaving as predicted: rising briskly.) 

[Source: St. Louis Fed]

In the long run, a falling dollar is usually a precursor to higher inflation.  So, in spite of the apparent short-run benefits, it would be better if the dollar leveled off, removing a measure of uncertainty.  Financial maneuvers to avoid inflation or deflation distract resources from the task of real growth.      

FQ.07.42: Favorite Quote for This Week

The key to being a good manager is keeping the people who hate me away from those who are still undecided.
—Casey Stengel

New book about capitalism; guess the author

Two days ago, I attended a lecture by the author of a new book full of good ideas.  The author is well-known, and articulates his book's theme with a charming sense of humor.  I enjoyed his presentation, and enjoyed meeting him afterwards. 

Read the following sample of ideas excerpted from his lecture and his book—then guess whether he has been pigeonholed as a "conservative" or a "liberal" by the media. 

• The corporate income tax should be eliminated.

• The biggest step toward solving the illegal immigration problem would be to eliminate all agriculture subsidies.

• Corporations are not evil—and that includes Wal-Mart.

• Our energy future will require "going nuclear" in a big way.

• We should be skeptical of any politician who blames a corporation for doing something that isn't illegal.

• Punitive fines that would cripple or destroy a company should not be allowed.

Is this well-known author a so-called conservative, or is he a so-called liberal?  What would the "liberal" mainstream media make of those ideas?  What would "conservative" talk-show hosts make of them? 

After you decide, click on the link below to see the answer.  Then buy the book; it is chock full of good, thought-provoking ideas. 

Ryan's tax plan: Relief from rising personal taxes?

Rep. Paul Ryan has introduced a bill to accomplish two things: end the Alternative Minimum Tax, and give individuals a much simpler alternative to the obese, special-interest-infested income tax code.  Ryan's bill would allow individuals to choose a simpler, dual-rate income tax (10% and 25%) with few deductions.  (Ryan's press release here; text of bill here.) 

Individuals would still be able to choose the current code with its multitude of deductions, complexity, and higher rates on taxable income.  My guess is that most taxpayers would go through both calculations, then choose the smaller number (I would)—but others would simply fire their tax accountants and choose the simpler way.  [I suppose there could be a third category: those who think we don't pay enough tax today.  Fortunately for them, I'm almost certain the IRS accepts payments over and above the amount actually owed, as long as it's designated properly; eg, "my contribution to deficit reduction or surplus enhancement."] 

Rising personal taxes
I decided to check the history of "personal current taxes" as a share of the economy (%GDP).  [In the NIPA tables, that number includes federal, state, & local taxes, but 85% of it is federal individual income taxes.]  As usual whenever I check the numbers, there was a bit of a surprise—one that gets little mention in the headlines for some reason: personal taxes have been increasing dramatically since 2003.  Personal current taxes now match the LBJ peak of 1969 (10.8% GDP), and are almost back to the Carter peak of 1981 (11.0% GDP); the trend is pointing toward a new all-time high (more than 13.0%) within just a few years.   I hope there's time to stop it; Ryan's bill might be just what we need, and just in time.

Here's the chart that surprised me; click to enlarge:

Personal taxes are growing faster than the economy, while more and more people are paying zero or negative income taxes.  In other words, not only are personal taxes rising, but the system is becoming more progressive.   

I have no argument against the progressivity, but the level of personal taxes looks high enough to me.  For that reason, I hope Paul Ryan's plan catches on; maybe that would level things out at the Carter peak (11.0%), two points below the all-time high.

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End note:
The growing economy since 2003, with no change in federal income tax rates, is responsible for the increasing personal taxes, largely because of low unemployment and the bracket-creep effect of rising incomes.  An interesting brain teaser is to ask, Which would be better for keeping the economy growing: the current income tax structure, Ryan's proposal, or a tax-rate increase?  Which would be more likely to slow down the economy?

FQ.07.41: Favorite Quote for This Week

Always do right.  This will gratify some people, and astonish the rest.
—Mark Twain

Deficit Watch, end of fiscal 2007

Once every twelve months, the rolling 12-month numbers are synchronized with the official "fiscal year" (October thru September).  This is it, and it's a better-looking trend this month—largely because of the corrected timing issue that dragged $50 billion of September's social security spending into August's numbers. 

Unfortunately, the trends are pointing towards a May 2009 balanced budget.  The reason that's unfortunate is because May 2009 is seven months too late to keep the politicians on both sides from demagoguing "the deficit" during the presidential campaign.  [I have given up on the hope that someone will ask the candidates "What's wrong with a deficit that doesn't increase the debt burden?" I have therefore fallen back on the hope that the budget will come into balance before fall 2008, because that would induce cognitive dissonance in every candidate fond of using "fixing the deficit" to justify whatever fiscal agenda they've already staked out.] 

My dream scenario, still, is to see tax-hiking politicians—on national television—stuttering like Porky Pig as they try to explain why we need tax hikes when we're already running a surplus.  (No doubt their justification would quickly and subtly shift to "the grim reaper just around the corner"—but at least "today's deficit" would no longer be a plausible scapegoat.)  However, my dream scenario cannot happen if the budget doesn't come into balance by fall '08.  May '09 would be too late to improve the election debate; worse, it would be just in time for the next president to take undeserved credit for "balancing the budget, at last."  How disgusting that would be.   

Anyway, here's the latest balanced-budget-trend chart; click to enlarge.

Two of the biggest contributors to tax receipts are individual income taxes and corporate income taxes, shown below.  The slowdown in corporate taxes is not encouraging; a pickup in the economy's performance would help move the overall trend in the correct direction. 

Lastly, regarding the social security spending blip we saw last month: The other shoe has dropped.  Several people had pointed out that a large portion of September's social security checks were cut in August; they were right, and it all leveled out in September.  This chart illustrates the net (neutral) effect of the timing blip:

Federal tax redistribution among the states

The Tax Foundation this week published the results of their study on how federal tax dollars are redistributed among the states. 

Those who like to separate the states into so-called red and blue buckets will no doubt notice that the "losers" (the states that give more than they receive) are predominantly blue states such as California, New York, etc.  But that shouldn't be a surprise, because it's a natural result of the taxation system: people with higher incomes pay more taxes than they get back in government services; people with lower incomes get more back than they pay in.  Consequently, states with more high-income people look like "losers" compared to states with more lower income people.  That's just the natural result of the tax system's redistributive effects, and the more progressive the tax structure, the more pronounced the redistributive effects.  No surprise, in other words.

I took the liberty of converting the Tax Foundation's numbers into a bar chart, below.  Be sure to read their press release at this link.