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October 2011 Archive for Economic Sense

RSS By: Matt Bogard, AgWeb.com

Matt's primary interest is in the biotech industry and ag policy.

Occupy Wall Street: Hitching a Ride on the Tea Party Express?

Oct 08, 2011

By Matt Bogard


The #occupywallstreet movement seems to be a pretty diverse group. From ‘trolling’ the occupywallstreet forums , there seems to be a big concern with corporatism, what economists would consider rent seeking- which is using the political apparatus to gain special favors (in terms of taxes, subsidies, or regulations) . There are also many concerned about the role of the Federal Reserve, which through the social planning of money and interest played a significant role in the financial crisis . And of course, many are rightfully upset over the bailouts. On most of these issues, if they are serious about their concerns, they find themselves practically standing hand-to-hand with the Tea Party. Then, on occasion you will find some listing demands for things like living wages, tariffs, and increased regulation, a Buffet style tax and other progressive end policies. So, you’ve got people within the same movement coming from entirely polar extremes, all converging on Wall-Street with a beef.  While nothing seems official, you can’t help but notice two major themes- 1) a call for getting the money out of politics and 2) class warfare between the top 1% (in income or wealth) and the other 99%. 
 
Last week, I presented an exhaustive look at the facts related to the distribution of income and taxes paid by the highest income earners. The facts showed that that the wealthy actually do pay more in taxes than their ‘secretaries’ and that the income gains over the last few decades have not gone mostly to the rich. (I have actually added even more to the evidence on my principles of economics blog here). But what about the top 1%?
 
First off, the top concern should not be the disparity of income or wealth in any society, but the process that generates that outcome. As the data I presented last week indicates, the process in the U.S. allows lots of movement and economic mobility.  In fact, a free society that produces unequal shares of income and wealth (including people like Bill Gates, the late Steve Jobs, and the numerous unspoken entrepreneurs) is the kind of society able to deliver a lifestyle and opportunities to the masses.
 
But, if class warfare is the end in itself, it is interesting to ask, just how much wealth do the top 1% of wealthiest Americans control? Depending on your source you can get different results. According to one source, the top 1 % of Americans (in terms of wealth)  ‘control’ about 20-25% of the nation’s wealth. Another source indicates that they ‘control’ closer to 40%.   But, again, when we look back over the last century, we don’t observe any drastic increase in the concentration of wealth. Whatever the correct number, the idea that the wealthiest Americans control any proportion of the nations wealth is a bit elusive. It might be better to state that the top 1% of wealthiest Americans are connected to 40% of the nations wealth. 
 
Of course, if we were talking about King Henry the VIII, or Adolph Hitler, or Joseph Stalin, we might correctly say that these people controlled vast amounts of resources vital to the well being of millions of their citizens. However, if you are a wealthy individual that owns as part of your vast wealth a large amount of Netfilix’ stock, what would you say you are in control of? Given the recent drastic plunge in its value, wouldn’t you say that although you were connected to that vast wealth, it is subject to the individual decisions of multitudes of consumers and other investors? The simple fact is, no matter what the asset, owning an asset (be it stocks, collectible sports cars, beach homes, yachts, or Scrooge McDuck’s Money Bin) entails opportunity costs.  Those opportunity costs arise as a direct result of other people’s desires and interest in owning or having access to those resources.  Maybe you own a ton of real estate in shopping centers. That is meaningful only as long as the rest of society values shopping centers. (Again, just ask Coca Cola when they changed their formula, Netflix when they changed their pricing structure, or Blockbuster before them). This is in fact why we have so much mobility in the income and wealth distribution as shown in the data! As my economics professor taught long ago, we the poor college students, were able to outbid wealthy people every day in the ordinary transactions of buying and selling.  One of the most basic principles of economics is that prices force you to consider the impacts of your choices on others. When it comes to allocating resources in society, the market is the great equalizer. Appealing to class warfare by dividing society into fractions of 1 & 99 really gets us nowhere.
 
Of course, we may agree that when the top 1% (along with corporations and special interests) use their wealth to influence politics the free society paradigm breaks down. In fact, many of the protestors on Wall Street agree with the idea that ‘a democratic government derives its just power from the people… and that no true democracy is attainable when the process is determined by economic power. ‘ 
 
As public choice economist Dennis Mueller is quoted in the article Public Choice Revolution:
 
"Interest groups will engage in what public choice theorists call "rent seeking," i.e., the search for redistributive benefits at the expense of others. The larger the state and the more benefits it can confer, the more rent-seeking will occur. The entire federal budget...can be viewed as a gigantic rent up for grabs for those who can exert the most political muscle."
 
 Our founders were well aware of these issues as stated in Federalist #10:
 
"From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties."
 
-like the 1% and the 99%?
 
In Federalist #10 they also warned us about the populist appeals and uprisings that may result, but proposed a solution:
 
"A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project…we behold a republican remedy for the diseases most incident to republican government."
 
But the solution is not more government control through regulation of redistributive Buffet taxes. The remedy proposed by the founders is embodied in a constitution, with specifically enumerated powers, not true democracy as quoted by the occupiers on Wall Street. If we look at the many powers of government today, how many were transfers of power away from the people by avoiding the amendment process or via crazy court decisions (like Helvering vs. Davis or  Wickard v. Filburn)  The purpose of the constitution was to ensure that the government did very little without the consent of the governed.  For the most part, that was achieved through legislation held in the strict bounds of enumerated powers, with expanded powers of government coming through the amendment process.  This strict adherence to constitutional principles was the foundation for a workable democratic constitutional republic, as stated by Economist Thomas Sowell in  Judicial Activism Reconsidered,

"The federal Constitution is "the supreme law of the land," not because it is more moral than state constitutions or state or federal legislative enactments, but because it represents a larger and more enduring majority. Minorities receive their constitutional rights from that enduring majority to which transient majorities bow, not from whatever abstract moral rights are imagined to exist as a brooding omnipresence in the sky."
 
Democracy, limited by strict adherence to constitutional principles meant that government would have few powers and resources to spend on corporate interests, or progressive objects of benevolence.   As Thomas Jefferson stated:
 
"in questions of power then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the constitution"
 
 If the occupiers are seriously concerned about money in politics, then, once again, they should find themselves in lockstep with the Tea Party in calling for a return to constitutional principles and limited government.  Time will tell if those occupying Wall Street calling for ending the Fed and crony capitalism are the true voice of the movement, or if they will ultimately find themselves tools for more interventionism through a progressive policy agenda.
 
 

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