Freeman

IT JUST AIN'T SO

Legalized Theft Is Good for the Poor?

Reich's Share-the-Wealth Plan Is Nothing But Another Ponzi Scheme

OCTOBER 01, 1999 by THOMAS J. DILORENZO

Filed Under : Socialism

Former U.S. Secretary of Labor Robert Reich spent the 1980s at Harvard’s Kennedy School of Government spreading lies in the service of socialism. Not socialism as government ownership of the means of production but rather, as F. A. Hayek defined it in The Road to Serfdom, “chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state.” He’s at it again now that he’s back in academe as a professor of social and economic policy at Brandeis University.

Reich began the decade of the ’80s writing books and articles with the Marxist economist Barry Bluestone about the “deindustrialization of America,” which, in their view, could only be stopped by the introduction of central planning, euphemistically called “industrial policy.” But America wasn’t deindustrializing. In a 1984 study published by the Heritage Foundation, I showed that the U.S. Commerce Department’s Index of Manufacturing was at an all-time high, and that manufacturing as a percentage of GDP was about the same in 1980 as it was in 1950. American industry was evolving, as it always has, but it wasn’t disappearing.

Then came the myth of the “great U-turn” in wages, with the average worker allegedly suffering a decline in wages and living standards. This myth was debunked by Richard McKenzie, who showed that if one considers total employee compensation, and not just wages, there is no “U-turn.”

Reich and Ira Magaziner also championed the view that the Japanese system of crony capitalism was the key to that country’s economic success and should be imitated by the United States. Now that the Japanese system has collapsed in a sea of corruption and bankruptcy, Reich is silent on the issue.

The late Murray Rothbard once asked Ludwig von Mises if he thought there was one single thing that designated an economy as primarily capitalist. Mises’s response was yes, a vigorous private capital market. For it is capital markets that facilitate the constant reallocation of capital, guided by consumer sovereignty, in a capitalist economy. So, naturally, Reich next wrote a book and a series of magazine articles criticizing private capital markets as essentially useless, part of a “paper economy” that supposedly adds nothing to production.

The Latest Crusade

In a May 16, 1999, Washington Post article titled “To Lift All Boats,” Reich is back to his old tricks. This time he endorses the Clinton administration’s scheme to use tax dollars to set up “Universal Savings Accounts” worth up to $2,000 for citizens with incomes under $40,000 per year. Another variant of this scheme that Reich writes approvingly of is Senator Bob Kerrey’s plan to give each newborn child $1,000 in tax money, along with $500 per year every year until age 21, to be deposited in a government-operated “savings account.” Then there’s Yale Law School’s Bruce Ackerman, who favors giving every 21-year-old $80,000 of someone else’s hard-earned income, no questions asked. This latter proposal really gets Reich excited. It can be funded, he says, with a mere “2 percent wealth tax on the wealthiest 40 percent of Americans.” That’s any family with an annual income of more than $40,000 per year, hardly what one would consider to be “wealthy.” (For those who believe the tax rate under such a scheme would remain at 2 percent, I’ve got some oceanfront property in Arizona I’d like to sell you.)

All these socialistic share-the-wealth plans are based on profound economic ignorance. The most fundamental problem is a problem of socialism generally, as Mises pointed out in his 1922 classic, Socialism: “The socialist community is characterized by the fact that in it there is no connection between production and distribution. The magnitude of the share [of income] which is assigned for the use of each citizen is quite independent of the value of the service he renders.”

Reich’s share-the-wealth plans are just another “entitlement” (to other people’s money) that will continue to destroy the work ethic by paying people for not working. Since economic reward is divorced from one’s service to consumers, the principle is the antithesis of how a market economy works. Reich, however, absurdly claims that it would expand “the benefits of a market economy.”

It would induce people to save less on their own, just as Social Security does. But once again, Reich gets everything backwards, arguing that it would “encourage saving.” In reality, the reduced savings rate would diminish the rate of capital accumulation and reduce economic growth. The annual cost of the programs, which would run in the tens of billions of dollars, would in itself depress the private sector because the opportunity cost of such programs is returning those tax dollars to their rightful owners, the people who earned them.

Static View

Reich’s case is based on a static view of the economy and the old socialist canard that there is a “lump” of wealth out there: if one person has more, others must have less. But the economy is dynamic; there is great mobility in a capitalist economy, and that mobility is driven by people’s desire to better themselves financially and materially. Giving some of them something for nothing, as Reich’s proposal does, can only diminish that incentive.

In their book, Myths of Rich and Poor, Michael Cox and Richard Alm examine a sample of more than 50,000 Americans from all socioeconomic backgrounds whose incomes have been tracked for more than 20 years. They found that those who started out in the bottom fifth of income earners in 1975 gained more than four times the income by 1991 than did the top fifth in 1975. In a dynamic, capitalist economy the “rich” may get richer, but the “poor” do even better.

Reich argues that the enormous flow of funds into the stock market in recent years doesn’t seem to have benefitted “the bottom 30 percent” very much. But those funds have financed the capital expansion and job creation that have made the U.S. economy the envy of the world. The “bottom 30 percent” has benefitted as much as anyone, if not more.

Reich’s share-the-wealth plan is nothing but another Ponzi scheme, not unlike Social Security, that is designed to help politicians buy the votes of a majority (the “bottom 60 percent”) by taxing a minority. As Rothbard wrote in The Ethics of Liberty, “the State is a coercive criminal organization that subsists by a regularized large-scale system of taxation-theft, and which gets away with it by engineering the support of a majority . . . through securing an alliance with a group of opinion-moulding intellectuals whom it rewards with a share in its power and pelf.” Professor Reich, take a bow.

—Thomas J. DiLorenzo

Professor of Economics

Loyola College, Maryland

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October 1999

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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