Archive for April 29th, 2011

Both President Reagan and President Obama had to deal with serious economic dislocation upon taking office.

But they used radically different approaches to deal with the problems they inherited. Reagan sought to reduce the burden of government, whereas Obama viewed government as an engine of growth.

So who had the right approach? This image, taken from an op-ed in today’s Wall Street Journal,  shows  quarterly economic growth (adjusted for inflation) for the seven quarters after the recession ended.

At the risk of sounding unscientific, Reagan mops the floor with Obama. Growth was much more robust under Reaganomics. The policy of Obamanomics, by contrast, is associated with sluggish economic performance. (Indeed, see this post, based on Minneapolis Fed data, for an even starker comparison.)

Most worrisome, the weak growth over the past seven quarters means the economy has not recovered the lost output caused by the recession. This is in contrast to past downturns, where a temporary fall in output was offset by a period of rapid growth when the recession ended. And since there’s no reason to expect a sudden boom now, this means a permanent loss of income for the American people.

To be sure, we have no idea what would have happened in the early 1980s without Reaganomics, just like we have no idea what would have happened the past few years if America had taken a different approach.

But when theory and evidence both point in a certain direction, perhaps it’s a good idea to at least consider the possibility that small government is better for prosperity than big government.

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Why do some people instinctively despise wealth and want to tear down those who are successful? This question has been percolating in my mind because I am in Monaco to speak to the IXth international conference of the Convention of Independent Financial Advisors.

This tiny principality is an amazingly prosperous place, easily the richest jurisdiction on the planet according to World Bank data. And it oozes glamor, with everything from the Grand Casino to the legacy of Princess Grace (who was breathtaking in Rear Window).

There is an incredibly high concentration of luxury cars in Monaco, and I can’t walk into my hotel without stumbling over a Rolls Royce or Ferrari. Not that this is a surprise. I’m staying at the Hermitage, a luxurious hotel where the cheap rooms cost more than $500 per night.

Thankfully, that doesn’t come out of my pocket since I’m a speaker. I did make the mistake, though, of getting a diet coke with my breakfast, not realizing that drinks weren’t included and that I would be responsible for the absurd extra charge of 7 euro (which is $10.40, so thank you, Ben Bernanke, for trashing the value of the dollar).

Anyhow, you get the picture. Let’s returns to the original question, dealing with perceptions of wealth. As I wander around Monaco, I don’t envy the wealth I see. I can imagine how nice it would be to have a lot of money, of course, but that doesn’t lead me to resent the rich people. Instead, I think about how they must have done something very productive to accumulate so much money.

Not everybody thinks this way. I was talking to a left-wing academic, who also is at the conference, and this person made a comment about all the “crooks” in Monaco. I asked for elaboration and this person asserted that the wealthy residents of Monaco were the beneficiaries of ill-gotten gains.

While I reject the blanket assertion, this person has a point. I’m sure any crowd of rich people includes some folks who got wealthy the wrong way. Maybe some of the people in Monaco were former government officials from other nations who figured out how to steal taxpayer funds. Maybe some of them benefited from special government favors such as exclusive licenses or protectionist barriers to monopolize a certain market and rip off consumers. And others may have been conventional crooks who obtained loot from things such as securities fraud.

As I pondered this issue, it got me thinking about the broader problem of left-wing hostility to wealth – a sentiment that you find even from statists who have a lot of money. Why do they feel this way?

I’m wondering whether part of the answer is that many rich leftists didn’t earn their money. Or, to be more precise, they got wealthy due to connections rather than achievement. And because of their personal experiences, they conclude that wealth in general isn’t really deserved. So why not subject rich people – including themselves – to high tax rates.

This is especially true for politicians. They tend to obtain money in ways that do not exactly fit the definition of entrepreneurship. Consider these examples:

o Barack Obama gets millions of dollars by cranking out a couple of books. Even if he wrote the books (many politicians let staffers do the work), he still must recognize that he didn’t really do anything but trade on his political status to pad his bank account. Moreover, his wife got big bucks representing Chicago hospitals, and it would require deliberate naiveté to believe her lucrative position had nothing to do with the couple’s political prominence.

o Bill Clinton’s perceptions of the free market were probably distorted by his participation in the Whitewater real estate project, which wound up being a bit of a scam. Also, Hillary Clinton raked in $100,000 as a young lawyer by trading cattle futures. Even assuming that money was legit, it would lead someone to think that wealth was a matter of luck.

I’m not trying to pick on prominent Democrats. Plenty of Republicans also cash in on their political connections. But GOPers generally don’t push for higher taxes on the “rich,” and the purpose of this post is to speculate on why rich leftists support class-warfare policies.

But let’s set aside personal stories and look at how left-wing politicians must see the world of wealth. They routinely meet with well-heeled interest groups that are looking to line their pockets because of government favoritism. One day, they hear from the fat cats from Archer Daniels Midland, who come into their office lobbying for more ethanol subsidies. The next day, they may get a visit from the executives from GM and Chrysler, who jet into town looking for more handouts. And the day after that, somebody from Wall Street may drop by seeking a bailout.

After enough exposure to such sleazeballs, we should not be too surprised that leftist politicians begin to assume that all wealth is unearned. And if it is not earned, that means the rich person does not have a moral claim on the money. So why not tax it at high rates?

So long as I am playing armchair psychologist, I will make two additional points.

First, rich people who got their money from connections and/or luck may feel a certain level of resentment toward those who got rich by producing something of value. So even if they recognize that some wealth is earned, that does not mean they will support good policy.

Second, my theory certainly does not explain everything. There are plenty of rich left wingers, such as Bill Gates and Warren Buffett, who genuinely earned their money. I have no idea how to explain their political views:

Perhaps the only thing we can safely conclude is that some rich people think the wrong way. Gee, what a brilliant insight!

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