In Wednesday’s Politico, Thomas Ricks writes about how he is turning left politically mid-life, outlining a growing disillusionment with American military, government and economic results.  Much of his criticisms I don’t fault, such as his specific criticisms of how and why we fought in Iraq (a subject I won’t delve into here).  But he also touches on economics, with thoughts completely opposite with reality; these I will address. Ricks writes,

I also have been dismayed by the transfer of massive amounts of wealth to the richest people in the country, a policy supported over the last 35 years by successive administrations of both parties. Apparently income redistribution downward is dangerously radical, but redistribution upward is just business as usual. The middle class used at least to get lip service from the rich—“backbone of the country” and such. Now it is often treated like a bunch of saps not aware enough to evade their taxes.

There is one aspect of income inequality in which Ricks is right (but leads to the exact opposite conclusion), yet the other is dead wrong; let’s address the latter first.  In market systems, wealth is created, not transferred. This goes straight to the heart of the progressive thinker’s biggest economic fallacy, that of a fixed pie.  In this view, if the rich get richer, the poor must get poorer.  For me to have a larger slice of pie, you must have a smaller.  But this is fundamentally wrong, and taught in all introductory economics classes.  Value is created two ways; the simplest being voluntary exchange.  When both people agree to trade, by the assumption of rationality and that we prefer more to less, we know that both sides believe any trade makes them better off; they subjectively assess themselves to be better off.  The other way value is created is by transformation of productive inputs into more highly valued productive outputs.  This is the heart of entrepreneurship, where entrepreneurs appraise current valuations of inputs and are alert to opportunities to bid away resource inputs and combine them into more highly valued outputs (as compared to their current use).  So whether it is General Motors taking raw steel and transforming it into a more highly valued automobile, or Google hiring a software programmer who is able to design a more efficient method of advertising on the web, value is created, not redistributed.  This value comes at no expense to the poor, it was not redistributed from them.  Without the rich, this value never would have been. Rather than stoke the flames of envy, as the left perpetually does with its focus on income inequality, we should instead praise the entrepreneurial processes which lead to more total output–output which benefits all of us to some degree, even when the lion’s share goes to the Zuckerbergs of the world.  In other words, economically we should not drift left, but drift toward liberty and markets (notice I didn’t say right).

But there is a sense in which Ricks is right about income inequality.  During the great recession especially, but even earlier to some degree, there are many Americans who get richer from rent seeking, or being beneficiaries of government action.  Rent seeking riches are found by Al Gore and Hillary Clinton*.  They are found by the Boeing Corporation and Solyndra.  They become richer not because they more assiduously serve customers and create value-added products, but government policies favor their interests.  Perhaps the greatest inequality increase of the last thirty years has happened since the 07-08 financial crisis.  The rich indeed are getting richer, while the poor are getting poorer under the Obama administration.  One of the biggest reasons for the rich getting richer is the Federal Reserve’s zero interest rate policy.  The goal of this action is to deliberately increase asset prices so that asset owners will feel wealthy enough to spend and invest.  Well who are the primary owners of financial assets?  That would be the very rich!  And who is hurt by this policy?  That would be anyone who has a saving or checking account with positive balances–that would generally be poorer people.  So yes there is a systematic redistribution of wealth from the poor to the rich–but it is not the free market system that is doing this, it is our official government policy.  The answer to this is get the government out of money–stop their ability to create winners and losers.

Mr. Ricks is also disgusted by the bank bailouts, and we completely agree.  But the progressive vision (and indeed the action as found in Dodd-Frank) is to further integrate the cronyism that is inherent in Wall Street.  We don’t need more regulation; we need less but effective regulation.  Simply significantly increase capital requirements on Wall Street banks (such that if they fail, their own capital is at risk, not the taxpayers), but then leave them alone.**  As it is, every progressive action puts the taxpayer more at risk, and encourages more rent seeking to obtain special favors from government.  Dodd-Frank has not made the banking system safer, but instead has worked to make more banks and other financial institutions “systemically important” such that they will both get more regulation (which will lead to more rent seeking) and they will be bailed out if they fail.  This is categorically NOT what free markets are all about; this is Crony Capitalism pure and simple.  Mr. Ricks should join us in the fight to eliminate government privilege, not to increase government power (which makes rent seeking more profitable).

EDIT:  Mr. Ricks disquiet over the turn of events in our government over the last 35 years or so (conveniently critics always begin with Reagan, as if everything was fine in the 70s) should cause him instead to notice one salient fact–during this time the regulatory and financial reach of combined government has grown tremendously.  Could that have anything to do with it?  Does he really think a progressive agenda which will give more of the same is likely to lead to a different result?  As Hayek said, “We shall not grow wiser before we learn that much that we have done was very foolish.”

So Bereans need to not just be upset at a problem, but need to think through why a problem exists–if we don’t understand the true nature of the problem, we are forever treating symptoms and not the disease.  In Mr. Rick’s case, his emotions are leading him in the exact opposite direction of where we ought to go.  We must love the Lord our God with all our hearts, all our souls and all our minds.

*Ask yourself this question.  Why did google pay Chelsea Clinton to promote computer programming to girls?  Why did NBC pay her $600,000 to be a reporter?  Seriously, does anybody think it is due to her computer programming skills, or her demonstrated reporting skills?

** My preferred regulatory approach is to regulate incentives, not behavior.  In other words, incentivize people to do the right thing, don’t tell them what they can or cannot do.  If you try to tell a firm what they cannot do, you are simply going to play the game of whack-a-mole; they won’t do what you tell them not to do, they’ll do something else which is likely much worse.