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Wednesday, September 3, 2014

Inclusive Capitalism?

The current system of interventionism and cronyism will not cure our economic woes

A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.  —Milton Friedman

As the economic recovery from the financial crisis continues to disappoint on a variety of fronts—particularly job creation and real income growth—calls for a more inclusive capitalism grow louder. A chorus of critics is particularly obsessed with what they perceive as an increasing inequality—of both income and opportunity—that the current system has wrought.

Income inequality has indeed increased over the last five years, primarily because of the sharp rebound in stocks (the market is up 200 percent since the depths of the downturn). But most measures of income inequality do not take into account taxes, social welfare transfer payments, or non-cash benefits such as health insurance and pension benefits. When these factors are considered inequality actually decreased between 2000 and 2010, according to a Brookings Institution analysis.

Even so, inequality isn’t the most meaningful number here: Income mobility gauges a country’s economic well-being more meaningfully. The opportunity and potential to move across the various income quintiles has long been a key hallmark of a dynamic, free, and open economy. On this front, movement remains vibrant.

In fact, studies show that the composition of the top percent of income earners is constantly in flux: Close to 60 percent of those in the top income quintile are projected to drop out within 20 years. Alternatively, history indicates that about half of those who begin in the bottom 20 percent move up the income quintile ladder within 10 years. So while the income growth of the top 20 percent gets all the attention, the data show that since the 1970s, all quintiles have seen both nominal and real income growth increases.

We are still faced with a host of serious economic problems, however: an alarming increase in our national debt, an impending entitlement and unfunded liability crisis, and an economic recovery that is exceedingly disappointing on a variety of fronts. Many are anxious to level the playing field with a more activist and interventionist government, including more progressive taxation and other redistribution schemes. The enthusiastic nature of their demands is reminiscent of what the eighteenth-century French philosopher Frédéric Bastiat called “legal plunder”—that is, using force to dictate politically favored distribution of income and wealth.

Fortunately, economic history has demonstrated that an elegantly simple solution is available to rectify these problems: real capitalism. The current American model is a far cry from the limited-government, free-enterprise system that has lifted more people out of poverty and raised living standards more successfully than any other method in the history of mankind.

Government spending at all levels now accounts for 41 percent of our national income, and the heavy hand of government now directly or indirectly controls large swaths of our economy in important areas like healthcare and education. In the meantime, entitlement spending—a good proxy for redistributing wealth as opposed to creating it—has grown from 31 percent of the federal budget in 1962 to over 62 percent today.

Alongside the growth of the entitlement state we have seen the increasing prevalence of crony capitalism—a condition in which favored industries enjoy monopoly powers granted by government. The means of such protections include intervention, mandates, regulations, and subsidies, which have prevented a free and competitive market from flourishing in many important areas. The Export-Import Bank, wind and solar power subsidies, ethanol subsidies, and the “too big to fail” doctrine are just the most-publicized examples. Such policies are bad for both taxpayers and innovators, as a rigged system that showers favoritism on certain industries promotes economic inefficiencies and corruption. Lobbyists and various insiders scramble to benefit from government spending and regulations.  

Of particular concern is the increasing prominence of a rule-making bureaucracy, including zealous federal agencies that, when combined with a cascade of executive orders, continue to move our economy in a direction outside of our constitutional principles and antithetical to free markets.

Unfortunately, a relatively supine Congress has shirked its responsibility on this front by ignoring the wisdom of James Madison, who advised in Federalist 58 that withholding funding would be the most effective way to curb presidential excess. 

It is also important to note that our founding fathers were adamant that character was essential, not only for effective self-government, but also for the proper and productive functioning of a market-oriented economy. As FEE President Larry Reed put it recently, “No people who lost their character kept their liberties.”

Unfortunately, a lack of integrity has become embedded in several segments of our society, economic and otherwise. Our elected officials and ever-expanding bureaucracy have, in an accelerating fashion, consistently violated the founders’ first principles. Thus, we are now faced with a legitimate and probable possibility that our liberties and prosperity will continue to erode. The always-skeptical Benjamin Franklin once said he and the other founders had given America a republic—“if you can keep it.” These days, that looks like a very big “if.”

A version of this article appeared in the Atlanta Business Chronicle.

  • Jay Bowen is President and Chief Investment Officer of Bowen, Hanes and Company, Inc., an Atlanta-based investment counseling firm, and a Trustee for the Foundation for Economic Education (FEE).