Mother of All Economics Blogs

From Wikimedia Commons (2007)

Note: This article was originally to be titled, "Sam Harris and his 'New Years Resolution for the Rich'", but as you will see momentarily, it turned into its own monster and needed to be renamed... However, it all starts with Dr. Harris.

Sam Harris is a great writer, an interesting guy and as far as I can tell, a hell of a neuroscientist... But he is unfortunately, no kind of economist at all.

And this is a big problem... Not just for Harris, but for a great many highly intelligent people out there in & out of academia. As a moral philosopher & ethicist, Harris has a lot to say, and few would (or should) question his motives or his values as far as I'm concerned.

However... Without a proper understanding of how economies work, how & why they grow, and perhaps most importantly of the myriad ways that government interventions can screw them up, people like Harris wind up making wildly inaccurate conclusions about how best to pursue their moral values. Worse still, because Harris is such a smart, authoritative, well-respected and it may be worth mentioning, good-looking, man; and because his ethical arguments are well constructed and popular; his conclusions are also taken for granted by everyone else as obviously true and reliable.

Yet... They are not.

In today's Huffington Post, Sam Harris writes what he calls, "A New Years Resolution for the Rich" where he begins with some legitimate facts and common moral premises like the idea that there are high levels of economic inequality among Americans and that we should all be concerned about problems of homelessness, hunger & the poor state of education... But then somewhere along the way, he goes awry and argues based on a lot of flawed - and ironically contradictory - economic & political premises.

It's a long piece, but this is one of those times where I think it's worth addressing large chunks of it point-by-point; partly because I fear that few people will actually be able to identify the issues, and also because I want to offer real solutions to his moral complaints.

So first, Harris provides us with the setting:

"While the United States has suffered the worst recession in living memory, I find that I have very few financial concerns. Many of my friends are in the same position: Most of us attended private schools and good universities, and we will be able to provide these same opportunities to our own children. No one in my immediate circle has a family member serving in Afghanistan or Iraq. In fact, in the aftermath of September 11th, 2001, the only sacrifice we were asked to make for our beloved country was to go shopping. Nearly a decade has passed, with our nation's influence and infrastructure crumbling by the hour, and yet those of us who have been so fortunate as to actually live the American dream--rather than merely dream it--have been spared every inconvenience."

And... He's right. This is the worst recession in living memory and I have no doubt that his friends - who are most likely high-paid speakers, internationally renowned college professors, best-selling authors & other public figures - aren't really feeling that much of the pinch.

He's also right that the only "sacrifice" we were asked to make for our beloved country was to go shopping. This is actually a key point which he glides over without really understanding it, so keep it in mind as I will return to it later.

Many fine organizations, such as the American Society for Civil Engineers, agree with his assessment of the crumbling infrastructure to boot... So I think we can all pretty much agree that Harris has highlighted some very real concerns.

Unfortunately, he goes on to say that the problem is - in essence - tax cuts.

The Problem with Raising Taxes

One of Harris' main theses is the idea that if we would just buckle down and raise taxes (most notably on the rich) we could improve our infrastructure, take care of our poor and fix our schools all in one go... But unfortunately, Dr. Harris is making a point that relies on some serious mistakes in both understanding economics & economic history. He begins by repeating one of the common memes of the progressive left:

"Most Americans believe that a person should enjoy the full fruits of his or her labors, however abundant. In this light, taxation tends to be seen as an intrinsic evil. It is worth noting, however, that throughout the 1950's--a decade for which American conservatives pretend to feel a harrowing sense of nostalgia--the marginal tax rate for the wealthy was over 90 percent. In fact, prior to the 1980's it never dipped below 70 percent. Since 1982, however, it has come down by half. In the meantime, the average net worth of the richest 1 percent of Americans has doubled (to $18.5 million), while that of the poorest 40 percent has fallen by 63 percent (to $2,200)."

Now... Of all people, a good scientist like Harris should certainly know that Correlation does not equal Causation.

Unfortunately, that's the very mistake he's making here.

Harris assumes that the lower tax-rates resulted in the income disparity. But this idea suffers two major flaws... First, it requires the assumption that the government taking from the rich does (or ever did) result in some major benefit to the poor and thus that higher tax rates would result in less poverty, presumably due to higher budgets available for welfare spending.

But why would we presume that? History says otherwise.

More Welfare Spending ≠ Less Poverty

It's certainly true that government spends more than ever on programs for the poor. Since Johnson's "War on Poverty" began, the United States has spent trillions of dollars on anti-poverty programs, but it has been a failure of epic proportions.

Exhibit A

So I don't get the logic Harris is suggesting I follow... If the rich contribute more to the US government in revenue, that doesn't intrinsically - much less realistically or historically - contribute a thing to the improvement of conditions of the bottom quintile. In fact, if history is any guide, the poor were generally doing better in many ways when we spent far less on anti-poverty initiatives. Thus if anyone was going to make a correlation vs. causation mistake here, it would be that increased spending on anti-poverty = more poverty... or at least it's provided 0 benefit what-so-ever.

I'll give you Exhibit A to the right, showing how of anti-poverty (welfare) spending in real dollars has massively exploded since Johnson's "War on Poverty" began.

Exhibit B

And... I'll give you Exhibit B to the left, which shows you that in spite of that voluminous anti-poverty spending, the poverty rates in the United States have remained steady for decades - after notably halting the sharp decline that occurred before the government really even got involved!

The idea that we aren't spending enough on social welfare programs is about as absurd as the idea that we don't spend "enough" on the military - in spite of the fact that we account for roughly half of all military spending worldwide and we spend something like 8 or 9 times more than the next largest military; China (see image).


The problem isn't how much we've spent, but how utterly ineffectual the massive pile of cash we've wasted has been at achieving the stated aims of welfare & anti-poverty programs. The same is true of education.

So, clearly, the first assumption one needs to make by believing in the necessity of higher taxation - at least for the purpose of funding welfare spending - is wrong. We spend trillions of dollars on these programs, and they just don't do anything.

More on why later.

The second mistaken premise that Harris relies on is that increased taxes actually do result in increased revenue. But............... They don't.

Higher Tax Rates ≠ Higher Government Revenue

It's quite true that in the late 1970s and early 1980s, the marginal tax rates for the top income earners began dropping from the extremely high rates they were set to for decades (though as you'll see in a moment, they actually began dropping with JFK in the 60s).

Harris neglects to mention that a big part of the reason that that was done was precisely because the 1970s were a disastrous time of economic "stagflation", where wages went nowhere, job growth was limited to non-existent and the cost of living was shooting up... *Cough*... Not unlike today.

What Harris also (rather importantly) leaves out, is the fact that in spite of the ridiculously high tax-rates of the 1950s, the actual revenue taken in by the Federal government flat-lined at a 61-year average of just under 17.9% of GDP.

And so it is that I bring you, Exhibit C:

Exhibit C
From 1945 - 2015, Income tax rates have ballooned to 90% and shrunk
to 32%, with very little difference 

Economist William Kurt Hauser first really studied this phenomenon in 1993, and it has since become known as "Hauser's Law", as kind of a corollary to the Laffer Curve. The Laffer Curve, you might remember, is the (frankly, ancient) theory that there is a maximum limit to the amount people will allow themselves to be taxed before either leaving a country or shifting their labor & resources to other pursuits.

Hauser's Law basically provides the empirical backing for Laffer's idea. But as I noted a few weeks ago, more empirical evidence for this can be demonstrated by looking at a break-down of how revenue is distributed between Income, Corporate, Social Security & Miscellaneous Taxes.

Thus, I give you, Exhibit D:

Exhibit D

What this shows is that when certain types taxes rise to extreme levels, producers change their behavior. And that REALLY matters!

Don't be shocked by this... People respond to incentives.

To illustrate, let me ask you to put yourself in the place of a successful entrepreneur for a moment. Consider this hypothetical:

Imagine you own a construction company or you've developed some popular iPhone App. Hypothetically, let's say that your business earns $1,000,000 a year in net profits minus your own salary (presumably your employee's salaries aren't really that modifiable and aren't the issue at stake here anyway since their taxes are their own problem).

Further consider that the tax rates on income are 35% this year for any wages above $250,000... Which is exactly what they are right now in the United States.

That's not so bad you think, so you pay yourself an income of $500,000 and you watch as $175,000 of that goes straight to the IRS, but the good news is; you still get to keep $325,000 of it, and you get to enjoy a pretty good lifestyle as a result. Nice house, fishing boat, the works...

Now say that some people like Sam Harris agitate for higher tax-rates and politicians push those rates up to 90% like they were in 1950 for the top wage earners.

You're no dummy. You can do basic math, and you realize that now, with the higher rates; if you pay yourself $500,000 you'd only be allowed to keep $50,000. Honestly, would you accept that?? My guess is that if you do, you're not a very savvy individual.

So what do you do?

Probably, you'd do what many businessmen did in the days of those high tax rates: You pay yourself less! Consider that if you just dropped your own wages down to slightly below $250,000 - in other words, if you put yourself into the next highest tax-bracket - and you are taxed at a rate of 33%, then you would get to keep $167,500 for yourself and your family. It's also not hard to imagine how you might make up the rest of the difference in terms of your standard of living... For instance you could give yourself a company car and live in a company owned house, paid for as "benefits" and not wages. There are many ways around losing your standard of living... and I'm guessing you'd do a decent job of figuring out what they were.

But here's the real kicker...

At the 35% tax rate, the government in our hypothetical situation was collecting $175,000 in revenue straight off the back of your success. Hoorah for politicians and supporters of non-deficit government spending! But jumping back up to 90% made you change your behavior, and instead of raking in the $450,000 the greedy politicians and envious proletariat wanted to collect, they only got $82,500 instead.

I'm working in hypotheticals here simply to explain how it works, but as I hope you can see from the graphs above, history provides excellent evidence that the theory is sound.

So... William Hauser's point in a recent Wall Street Journal Op-Ed was that it's better (in terms of actual revenue collection) for the government to collect a smaller percentage of a much bigger pie (35% of $500,000) than going for the larger percentage of the much smaller pie. Politicians, and academics like Dr. Harris unfortunately, never seem to learn this lesson. Instead, they become reality-denialists or moral scolds who believe that we can simply use force to not only make businessmen take massive losses, but that there wouldn't be any negative consequences to severely punishing high levels of income earning.

Knowing all this, it forces me to contend that most of the talk about taxing the rich in America more is either done out of ignorance of history & economics, or it's just about punishing those we envy, rather than doing anything substantial to pay for government services.

Exhibit E

Now... As a counter argument, you might suggest that a jump from 35% to say 40% could result in more revenue without too many major negative side-effects to production... That might be possible, however... History doesn't support that case either. Note that contrary to all the hubbub about the "Bush Tax Rates" being unfair to the poor, the reality is that comparing the pre-cut tax burdens of 2000 to post-cut tax burdens in 2006 as a percentage of overall Federal Revenue, the poor paid even less and the rich even more.

And so... I give you Exhibit E. I already wrote about all this earlier this month right here at this blog.

So, again, I fail to see the logic of Harris' argument... Tons of people out there are promoting the narrative that the Bush tax cuts resulted in less revenue to the Federal Government, and thus spawned all these cuts in social welfare spending that have then contributed to the wealth-gap in the United States increasing.

Alas, that's not true in the slightest.

Not only did the decrease in top marginal tax rates coincide with a general increase in the overall revenue (a 35% increase from 2003 to 2006 according to the CBO) - albeit this is largely an artifact of currency inflation (more on that later as well) - it actually resulted in a more progressive tax distribution where the poor paid a lower (even negative) share and the rich paid an even higher share of the overall taxes. On top of all of that, in spite of the increase in both tax revenues, progressive distribution of taxation and a massive and on-going increase in social welfare funding... The wealth gap grew and poverty did not shrink.

Progressive say "What!?"

The strange thing here is that some of the left's big heroes have recognized this problem in the past and taken steps to correct. With the Revenue Act of 1964, President Kennedy massively lowered the top marginal tax rates from 90% to 71%, and guess what happened:

• GNP rose 10% in the first year
• Disposable income rose to 15% in 1966 alone
• Federal Revenues went from $94 billion in 1964 to $150 billion in 1967
• Unemployment dropped to 3.8% by 1966 from 5.2% just two years earlier

Cool huh?

Tax rates went down... The economy grew, unemployment went down & Federal revenues went up - not unlike what actually happened again in the 1980's, and again in the 2000's.

Now... Again, this is a case of rates much higher than today, but then, market conditions are substantially different as well. With the ability for people to move their entire businesses to more economically friendly places like Singapore or Hong Kong, and with international competition from Europe, Asia and even parts of South America, I strongly doubt a top rate of anything approaching 70% would be remotely possible today.

But... Harris continues:

"We now live in a country in which the bottom 40 percent (120 million people) owns just 0.3 percent of the wealth. Data of this kind make one feel that one is participating in a vast psychological experiment: Just how much inequality can free people endure? Have you seen Ralph Lauren's car collection? Yes, it is beautiful. It also cost hundreds of millions of dollars. "So what?" many people will say. "It's his money. He earned it. He should be able to do whatever he wants with it." In conservative circles, expressing any doubt on this point has long been synonymous with Marxism."

There's a lot less to say about all this in general, but it's still really important to understand where Sam Harris' ignorance of economics is letting him, and his readers, down.

First of all, the bottom 40% of Americans do not control/own "just 0.3 percent of the wealth". They - if that number is taken as fact - control just 0.3% of America's MONEY.

Money & wealth are not synonymous.

Money vs. Wealth

Money is representational, shifting in value, and in a lot of ways - at least under our fiat currency system - illusory. Wealth is defined thusly:

Economics
a. all things that have a monetary or exchange value.
b. anything that has utility and is capable of being appropriated or exchanged.

Note that wealth is not money. It's about "stuff". And the rich people in the United States - and really anywhere around the world don't own, and most certainly don't control 99.7% of the world's "stuff". They don't own all the houses, all the TVs, all the couches & chairs, all the food, all the cars... Not by a long shot.

Wealth, unfortunately, is actually kind of hard to measure - but look around and consider all the material things, the goods that you own that you value and which make your life better, whether or not you consume them like food; or you make money with them, like I do with my computers; or you just like the way they look, like the paintings on your wall. All that stuff is wealth.

The money in your pocket is not.

It's potential wealth. It's representational of wealth you've given to other people in the form of your labor & productive time, but it is not - itself - wealth.

So Harris gets a basic point wrong here, as do many people when they talk about these things.

And it actually is really important to understand this issue properly, because it profoundly impacts how you view the gap in wages and the general inequality of the United States. If you see the amount of money someone has as actual wealth, then it's shocking when you consider how much some people have and how little you have. But if you consider wealth what it actually is, you'd actually realize that real wealth among all people has gone up dramatically over the past 100 years. The gap in real wealth has decreased, not increased... at least in terms of marginal utility.

If you want to talk about the wealth gap for real, then we should be talking about the fact that the poor in America are, by and large, not hungry now as they used to be. The vast majority of us are living in reasonably decent homes, wearing acceptable clothing and enjoying the benefits of heating in the winter & air conditioning in the summer. 99% of us own televisions, for goodness sake!

Our lives are all now so filled with luxuries that the richest people 75 years ago barely had access to that we don't even recognize it. So... Just make a note of that. Also make a note of the fact that the vast majority of "controlled" money is tied up in capital that is very likely paying the up-front costs for you or someone you know to buy a car or build a house, or open a new business. Much of the money that exists in that form is working largely to your own benefit - with the caveat that at the end of the day, the rich guy who put it up to begin with gets it back with some interest.

That said, the gap in income, wages and monetary savings is certainly a big concern, but it is the consequence not of something trivial like top marginal tax rates, as I think I proved above, but rather of the much much bigger issue of central planning the currency. In short, the wage gap is the fault of the Fed, and the entire Fractional Reserve banking system. Yet again... More on that later.

The other notable problem with the passage above is that Harris fails to see the bigger picture on Ralph Lauren's giant car collection.

Seeing the Unseen

Interestingly, he's basically making the same argument my own father did once when touring Rodeo Drive in Los Angeles. He was appalled by the opulence of it all... Ultimately, I think it was just wealth-envy. Ironic for someone who owns a Porsche, but whatever. The thing is, my father - not unlike Dr. Harris - never went the step beyond the first level that he saw in front of him.

Who made the cars that Ralph Lauren owns? Who made the tires? The ball-bearings? The engine?

Who sold Ralph Lauren those cars? Who cleans them? Who takes care of them? Who built the garage that he keeps them in and who are the mechanics who keep them running?

As you might guess, the answer to all of those questions is most emphatically not going to be filled people who are as rich as the clothing magnate. Ralph Lauren has opted to trade in large sums of his amassed money in exchange for goods & services that he values more - in this case cars. The recipients of that money are ordinary people working normal jobs who - as a result - have incomes with which to spend on things that they value, including on starting new businesses that compete with Ralph Lauren, produce even more stuff, bringing prices down and providing jobs to a whole new crop of employment-seekers.

Now... Maybe their incomes aren't large enough to also procure a giant collection of cars, but that's also not really necessary given the issue of marginal utility (once you have one car, there are diminishing returns in owning more in terms of practical application, so really who needs to own a giant car collection?).

The thing I've always found a little amusing is that if you think that Ralph Lauren or other really rich people aren't doing anything good with the money they have (generally not true, but whatever), then having them give up ridiculous sums of their money on frivolous items puts that money back into the hands of people who need it more and will ostensibly use it for better things... So... By all means, let the Ralph Laurens of the world consume away.

So those are two crucial issues: Understanding that wealth is not money, and that goods & services must be produced can help you to understand and possibly even manage that feeling that when people are better off than you it's come at your expense. In general... It hasn't. Certainly not in the case of Ralph Lauren... There's a guy who provided goods that millions, possibly billions of people over the years have decided they value and want to pay for. Congratulations to him for that success, and congratulations to all the people who enjoy wearing his clothing and benefited from the exchange.

But Harris continues, rightly pointing out the dark underbelly of people that our economy has not benefited:

"And yet over one million American children are now homeless. People on Medicare are being denied life-saving organ transplants that were routinely covered before the recession. Over one quarter of our nation's bridges are structurally deficient. When might be a convenient time to ask the richest Americans to help solve problems of this kind? How about now?"

There's no doubt that too many people are seriously poor, and that far too few people are able to get organ transplants (the solution to this is paying people to become organ donors, by the way), and that we probably need some new bridges and whatnot. But it's entirely a non-sequitur to suggest that the solution is higher taxes.

It's also kind of silly - given the distribution of tax-burdens I discussed above - to suggest that "the richest Americans" aren't already contributing significantly to the government's plans to fix all of those things. Harris follows his non-sequitur with what is essentially a straw man:

"But I can't imagine that anyone seriously believes that the current level of wealth inequality in the United States is good and worth maintaining, or that our government's first priority should be to spare a privileged person like myself the slightest hardship as this once great nation falls into ruin."

He's probably right, no one does seriously believe that the level of wealth inequality is worth maintaining - at least, not for its own sake. And I certainly don't intend to spare people like Sam Harris from the "slightest hardship".

But the problem is, Sam Harris' lack of economics knowledge leads him to make radically incorrect conclusions about both the causes and the solutions to the problems he sees facing America.

For Harris, there doesn't seem to be any problem facing society - from infrastructure, to poverty, to hunger, to basic education that isn't solvable by dumping a big fat pile of money on it. And that money must necessarily come from "the rich". He writes at length about education.

Higher Spending in Education ≠ Better Schools

Harris goes on to say:

"Needless to say, most Americans have no choice but to send their children to terrible schools--where they will learn the lesser part of nothing and emerge already beggared by a national debt now on course to reach $20 trillion. And yet Republicans in every state can successfully campaign on a promise to spend less on luxuries like education, while delivering tax cuts to people who, if asked to guess their own net worth, could not come within $10 million of the correct figure if their lives depended on it."

Yet this argument rests on the stock, populist assumption that government spending is always and forever the answer to problems in society. But again, this is historically & economically problematic. Harris fails to recognize the basic fact that the United States spends far more per child than any virtually any other country in the world on education (we may be tied with Switzerland) - at over $11,000 a head by OECD estimates.

So again, if we are to believe the assumptions that Harris relies on - in this case, namely that higher spending = better results - then why are the comparative metrics about academic success so disproportionately bad for America's students??

Harris doesn't address that question at all.

Likewise, if we delve even a bit further, we can find that some of the states that spend the most in the US on public education have the worst school districts by far... For example, New Jersey spends around $13,800 per student and yet has one of the worst education systems in America. Contrast this with a state like Utah, which has, by most testable metrics anyway, a very high standard of public education, but which only spends $5,257 per child.

Exhibit F

So please... Where is the evidence that increases in spending on education are going to result in higher educational achievement nation-wide? The data is simply not there. Check Exhibit F to the left. We have increased education spending to a massive degree over the past 40+ years, and we have no meaningful results to show for it!

And honestly, this is my big beef with the entire article.

Coming from a really good scientist like Sam Harris, his logic in this instance is weak - still largely relying on non-sequiturs and various economic fallacies - and maybe even more importantly, his conclusions are utterly lacking in any form of empirical support.

So, sure... We can raise taxes on the rich. Just don't expect Federal revenue to increase by any substantial amount as a result. And sure, we can spend more on education and anti-poverty initiatives... But I wouldn't count on any improvement in the conditions of the poor or in our international ranking in math & science.

At Last... Redistributionism Revealed!

Harris' conclusion is unsurprising, and it's stated plainly towards the end:

"American opposition to the "redistribution of wealth" has achieved the luster of a religious creed. And, as with all religions, one finds the faithful witlessly espousing doctrines that harm almost everyone, including their own children.
...
The truth, however, is that everyone must favor the "redistribution of wealth" at some point. This relates directly to the issue of education: as the necessity of doing boring and dangerous work disappears--whether because we have built better machines and infrastructure, or shipped our least desirable jobs overseas--people need to be better educated so that they can apply themselves to more interesting work. Who will pay for this? There is only one group of people who can pay for anything at this point: the wealthy."

Then he eschews the very idea of individualism:

"To make matters more difficult, Americans have made a religious fetish of something called "self-reliance." Most seem to think that while a person may not be responsible for the opportunities he gets in life, each is entirely responsible for what he makes of these opportunities. This is, without question, a false view of the human condition.
...
There is not a person on earth who chose his genome, or the country of his birth, or the political and economic conditions that prevailed at moments crucial to his progress. Consequently, no one is responsible for his intelligence, range of talents, or ability to do productive work. If you have struggled to make the most of what Nature gave you, you must still admit that Nature also gave you the ability and inclination to struggle.
...
And yet devotees of self-reliance rail against those who would receive entitlements of various sorts--health care, education, etc.--while feeling unselfconsciously entitled to their relative good fortune."

Well... True enough. Life isn't fair. I hope no one promised Dr. Harris that it was...

But genome doesn't actually account for that much or explain the relative success of different people. There are insanely wealthy people who aren't particularly bright, particularly athletic or particularly well-liked and then, there are wealthy people out there who are all of those things. Most people obtain great wealth like Ralph Lauren did: By providing other people with a service or a good that they value, and offering it at a price other people are willing to pay.

In one of my favorite quotes of all time; Economist, Walter Williams explains:

"We might think of dollars as being "certificates of performance." The better I serve my fellow man, and the higher the value he places on that service, the more certificates of performance he gives me. The more certificates I earn, the greater my claim on the goods my fellow man produces. That's the morality of the market. In order for one to have a claim on what his fellow man produces, he must first serve him. Contrast that moral standard to Congress' standing offer, "Vote for me and I'll take what your fellow man produces and give it to you."

There's no magic in genetics that gives some people a perfect leg up. We're all born with different talents and skills and we all acquire radically different sets of knowledge over the course of our lives. Certainly in my experience, the big difference in success is not about where we start, but what philosophies we accept and what we choose to do. To deny that, or to downplay that really does no one any good... That doesn't mean that we shouldn't care when people are less fortunate than us, but to write-off the role individual choices play is an insult to the millions of people - like me - who have taken risks in their lives and accepted the rewards & consequences of those choices.

Yes. I wasn't born with Down Syndrome. And I'm glad for that... But who am I supposed to "thank" for that? God? I don't believe in god, and neither (I'm pretty sure) does Harris.

Am I supposed to feel intrinsically guilty for being a part of a group that encompasses something like 99.9% of the population? I don't know... Doesn't really seem like I should. Likewise, ignoring the role individual perseverance and hard work play in economic success has been a recurring theme of our failed education system for decades, and as far as I can tell all it's produced is a few generations of people with severe cases of wealth envy and a giant sense of entitlement built around the premise that life isn't fair and success & failure are nothing but dumb luck anyway.

I doubt that's what Dr. Harris has in mind, but there are consequences to accepting different ideas from the standpoint of practical philosophy. Believing in your own ability to control your own destiny - as opposed to believing that our lot in life is predestined (either by god, or by genetics) - is profoundly beneficial. Ask any of the people who have studied the habits of wealthy people and patterns emerge. One of those patterns is a consistent sense of pro-active individualism. See Napoleon Hill for more.

And frankly, he's wrong that it's the "wealthy" that need to pay for everything... But the reason he believes this is because fundamentally, each of his proposed solutions entirely revolve around some form of top-down, centrally planned activity - mostly through government, but also from private philanthropy as well.

Instead of relying on rich people to drop boatloads of cash on people out of either the goodness of their hearts, or because if they don't, men with guns will stop by and take them to jail, we should rely on the power of individuals producing goods & services that are wanted & needed by others and trading to mutual benefit. It may surprise some people to learn that this is exactly how education is improving in some parts of Africa. Private schools are being developed by various concerned entrepreneurs; and strangely, parents in the poorest part of the world are still able to find ways to afford the tuition - in spite of "free" government-run schools being available.

The point here is that we don't need top-down solutions imposed on everyone by a group of planners and funded by "the rich". We need simply to allow people to develop bottom-up, pluralistic solutions through the spontaneous order of the market.

If Sam Harris is All Wrong, What's Right?

Ok, ok... If you've made it this far, you're probably thinking;

"Well, fine, Sean... You've been a big 'ol naysayer. So Harris is wrong on taxes, wrong on revenue, wrong on economic history, wrong on spending for education and anti-poverty initiatives and apparently even wrong on the causes of the gap in money, which isn't the same thing as wealth. But then, if you agree with all of the problems Harris has highlighted, what are your explanations for why they exist and how would you solve them??"

Fair enough.

First off, let's talk about the gap in incomes. I've written about this a little bit in the past, and for a long time now I've intended to write at length about the so-called "wealth gap". As I discussed above, it's first worth noting that the wealth gap is actually mostly a money gap, but why does it happen, and why is it growing?

As I already touched on, the answer lies with the Federal Reserve, fiat money and the fractional reserve banking system itself.

The Federal Reserve, Fiat Money & Fractional Reserve Banking

Exhibit G
In red: Financial sector wages
In blue: All wages averaged

Understanding how that system works is key to understanding why it results in gigantic payments to the biggest banks & wealthiest financial bankers, in many ways at the expense of everyone else.  Note Exhibit G.

To sum it all up in a few sentences, the basic definition of Fractional Reserve Banking (from www.investorwords.com) is as follows:

"A banking system in which only a fraction of the total deposits managed by a bank must be kept in reserve. The amount of the deposits equals the amount of the reserves times the deposit multiplier. In the U.S., this system is maintained by the Federal Reserve Board."

A typical level of leveraging is around 9:1, meaning that a bank would lend out $9 for each $1 it retains in deposits.

The non-cynical version of why this is a decent idea is that based on our faith in the banking system, lending out at leveraged rates can result in more capital flowing to entrepreneurs and other individuals who will produce goods & services and pay the loans back with interest. Of course, the first question that we must ask is: If there was only $1 deposited, and $9 lent out, where did the new money come from? 

Well... Essentially, out of thin air.

In theory, that $9 only exists in the accounts of the bank, and disappears the instant the money loaned is paid back. As a result, the growth of the money supply is slowed somewhat because currency is being "destroyed" each time a loan is repaid.

Since inflation is ultimately the expansion of the money supply, and because high inflation ultimately robs us all of our purchasing power (more dollars chasing after the same amount of goods = higher price per unit of good), it's a good thing that with each transaction I don't add 9 times the amount of money into the money supply without anything taking it away... But I'm still expanding the money supply with each transaction either way.

Here's the first part of a video series on the topic:

Note: I don't actually agree with all of the conclusions at the end of this series, but it does a decent job of explaining the basics.

So... What does this have to do with the money/wage gap? Just about everything!

When new money is created out of thin air, it goes to bankers. Those bankers turn around and loan out several times more money than they actually have in reserves and it cycles around repeatedly through the entire banking system and the people at the top not only get to direct the flow of money, but also collect interest on every dollar they loan out - again, review Exhibit G.

I get that this is complex, but at root, it all means that the financial system in America, and around the world produces two things: Inflation, and exponential benefits for those who control the system and get the new money first.

In the US, the Federal Reserve centrally plans money supplies and interest rates (these are intertwined), and selects the recipients of newly created money. Then, typically, the recipients will loan money to cover government's expenses - thus producing much of our deficit/debt spending.

This is "great" for government in certain ways - because they get to spend tons and tons of money on wars, on give-aways to special interests, and towards all that social welfare spending that Sam Harris seems to think we don't do... And all without imposing higher taxes on already cash-strapped tax-payers. The seedy side of all of this is that monetary expansion has been the primary means of funding war after war in the US.

The reason we got a "second central bank" was because without one, we had trouble financing the War of 1812 and the rulers were afraid of that happening again. And although Andrew Jackson vetoed its charter renewal in 1832, Abraham Lincoln (and Jefferson Davis) still managed to expand the money supply massively - both in the North & the South - to fund the Civil War. Eventually, with about 80 years of no central bank in the US, the Federal Reserve was created in 1913... Just in the nick of time to fund World War I with a credit expansion, and we've been down that path ever since - funding WWII, the Korean War, the Vietnam War, and of course, the wars in Afghanistan & Iraq all with debt and inflation.

The legacy of the Federal Reserve isn't "stable prices" as is supposedly its mandate... But rather the opposite! See Exhibit H.

Purchasing power has diminished by around 96% since the creation of the Federal Reserve (and I'm sure much more if you factor in the recent trillions of dollars in monetary expansion), and the rich - specifically those directly and tangentially connected to the financial sector - have gotten much richer at far higher rates than everybody else. It's important to make the distinction about how rich people attained their comparative wealth, though. Few would begrudge Steve Jobs the money he has amassed by providing the world with the iPhone or the Macbook Pro... And what Jobs decides to do with the money he has amassed should be his business. But the money amassed by investment bankers, profiting off of the devaluation of the currency are another matter entirely... The debt-based system works in the favor of the titans of finance... And I'm really not sure why anyone would be surprised by that.

Exhibit H

Moreover, once the gold standard was finally abandoned in 1971, the Federal Reserve became free to expand the money supply at a much more rapid pace than they'd done previously. And surprise surprise, both the "wealth-gap", and inflation rates really take off right at that moment. Consider Exhibit G again, and take note of Exhibit H to the left.

The lack of sound money is easily the biggest problem we have facing the American economy - and its symptoms include ever-higher costs of living,  increased gap in incomes for executives first in banking, then in other industries as CEOs expect (and get) wage parity just like everyone else., and of course, the misallocation of resources that winds up collapsing every few years.

Artificial credit expansions are bad, guys. Very bad.

So... If you want to curtail the wage/money gap between rich & poor, and you'd like people to become rich by earning their living providing goods & services valuable to others (like Ralph Lauren) instead of by being the recipients of trillions of brand new Fed-created dollars and the resulting interest on lending that money out to other banks, big businesses & big governments, then you have to start by getting rid or the Federal Reserve system and return to either a free-market banking & monetary system, or at least a sound-money system backed by gold or some other commodity.

Another point that's worth bringing up in this segment is that when the currency supply is rapidly expanding, measurements of the like GDP, which are nominally measured in money, are basically rendered meaningless.

Consider a small example. Imagine an economy with 100 apples and $100 in the money supply. There are no other goods, no other money. Each apple is worth $1, and if each is bought once, we say the economy has a GDP of $100. Now... Add $900 to the money supply, but no new apples. Now each apple is worth $10 and suddenly the GDP leaps up to $1,000. See the problem? GDP grew by a whopping 10 times... But the actual wealth available (all the apples) didn't increase at all. Thus the new GDP compared to the old GDP tells you absolutely nothing of any value at all.

So... That's step one. Get rid of the Federal Reserve... I guarantee you the wage gap will start sorting itself out.

Government Spending Makes Us Poorer!

At the very top of this essay, I quoted Sam Harris claiming that the government's response to 9/11 was to ask us to "spend" more. He was right about that... But while he spends a lot of time blaming Republicans for bad things in the economy, he fails to note that Obama's response to the financial crisis was also to tell us all to spend.

Go back and review what I wrote about the Federal Reserve, and suddenly, you should understand why every politician - every so-called leader - wants us to spend more.

The entire banking system and a large percentage of mainstream economic philosophy is predicated on the false belief that spending - rather than savings and under-consumption - is the driver of economic growth. The debt-based banking system requires you to borrow from them and spend money in order for the money supply to grow - which both enriches the bankers, and funds the activities of government - thus politicians and their friends in finance want you to spend everything you've got and borrow in order to spend even more.

But spending is usually the problem. Especially government spending.

Harris needs to remember that the reason taxes are an intrinsic evil is because they are theft. They are the taking of one person's property upon threat of jail or death (try strongly resisting arrest and see how alive you are at the end of the process). Government is financed by force. And anything government spends money on must first be taken from someone else, or - in a more dastardly solution - taken from future "someone elses" and out of everyone's purchasing power.

This is where it's key to see the "unseen" consequences of high taxes, and massive spending initiatives.

All those trillions of dollars that flow into the war machine, into social welfare, into the Department of Education had to come at the expense of the many millions of potential uses the taxpayers would have put that money towards instead. Unfortunately, due to the Calculation Problem, government has no good way to know how to best allocate their resources or effectively spend money - and thus, with almost extreme levels of certainty, I feel confident in saying that the private uses would have resulted in far more beneficial and robust economic growth.

Likewise, in spite of claims of fancy Keynesian "multipliers" leading to government spending being a good thing, the true multiplier effect measured from real historical data is less than 1, not greater than 1 like Keynesian models would have us believe. Economist Robert Barro estimates that the real "multiplier" is more like 0.8... Meaning that for every dollar spent by the US government the economic output garnered by the spending is 80 cents. In other words, government spending is - on net - typically a 20% loss to the economy at large.

In Barro's own words:

"The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP."

Moreover, true economic growth comes from production - not consumption (because real wealth is not money, but rather goods which must be created... can't very well eat a 100 dollar bill after all). But the government is - with limited exceptions - almost entirely consumption. It takes money out of the productive sector and uses it to fund the activities of an entire class of people who produce nothing but paperwork, rules & regulations and transfer payments.

As we increase government spending, we become poorer as a nation for many reasons. And as government subsidizes things like education, health care, agriculture or housing, the primary result is for those things to become more abundant and yet also more expensive.

Put the credit expansion together with the subsidies and policies that promote growth in specific sectors of the economy, and the result is the Boom & Bust Cycle. Consult Austrian Business Cycle Theory for more.

Misallocated resources build up in the system, and we consume away all our resources - so when the house of cards topples, we have nothing to fall back on, and each time this happens, it gets worse & more severe. Meanwhile, wealthy bankers clean up... So yeah, certain financiers are problematic and probably don't deserve a good portion of their amassed riches - but taxing it away from them doesn't do much good, especially when they can just expand the money supply again and make it all back, or better yet, get the tax-payers to give them hundreds of billions of dollars in bailouts.

Poverty, Welfare and Free Markets

Contrary to Harris' point... What the poor need is not more handouts or transfer payments that just get consumed into oblivion.

The poor need access to inexpensive goods and stable jobs.

Access to inexpensive goods is accomplished through market competition driving prices down and quality up without manipulations by government screwing up the information provided by prices, profits & losses. Fortunately, this is fairly robust in many aspects of American life, thus how a majority of us own 3 or more television sets, and nearly everyone has a cell-phone & a computer. But inflation counteracts all those gains... So one great way to help the poor would be to stop expanding the money supply all the time!!


Eliminating the constant credit expansion binge America is so addicted to would mean slowly falling prices as more goods are available for the same amount of dollars.

Stable jobs are produced in an economy that isn't manipulated by meddling central authorities... Again, credit expansions are a problem, because they produce more money that then flows to productive activities that are unsustainable. But in this case, another big problem is subsidies and various laws pushing the increase of activity in certain sectors of the market regardless of legitimate consumer demand.

A free market, and a banking system that isn't controlling the interest rate or constantly ballooning the supply of money, is the best bet for long-term sustainable economic growth. And that, in turn, is by far the best anti-poverty program imaginable. Private charity is good... but again, it's consumption and not production.

So Harris' grand idea of having all the billionaires in the world donate gobs of their money to charity is great, but... What happens when it runs out?

What happens when all that money has been "redistributed", and all the food and housing has been purchased and used up? Now no one has any savings, and there's still a big group of poor people struggling to get by because instead of finding opportunities to become productive - they subsisted on the dwindling savings of others.

As Margaret Thatcher said;

"The problem with socialism is that eventually you run out of other people's money."

Indeed you do... And when you do, you have big problems. America is going to figure that out soon... Because guess what, we're doing exactly what the USSR set out to do so many decades ago.

We need to stop doing that now... Actually... We need to have stopped doing it years ago.

Reversing the growth of government by reducing the money it takes from the productive sector, and by eliminating the thousands of laws & regulations that make entrepreneurialism impossible for many people is the right way to go. In the process, the poor will benefit as they do all over the world from increases in opportunity and not being handicapped by a system that only rewards the well-connected. Even without changing the banking policies, more economic liberty would be better... Check out Johan Norberg's excellent Channel4 UK documentary on the benefits of global advances in economic liberty:



Norberg says: "Good intentions don't make the world a better place"... No they don't.

Fixing Education Requires Ideological Change

As for education... I think the clear answer is freedom of choice.

Looking around the world, we find examples of education systems that spend far less per pupil than we do but which out-perform our students repeatedly on just about any test you can imagine. The difference in most cases is that other systems have substantially more freedom in many different ways. Many have more emphasis on local control of curriculum and broad individual autonomy for teachers in terms of methods - and most leave far more control in the hands of parents to choose the right school for their child rather than being stuck with the one in nearest geographical proximity.

Other nations do this by allowing significantly more opportunities for privately operated schools, and instead of attaching money to the schools themselves, they attach public money to the students - who can pick and choose from a number of options.

It always comes back to freedom.

And that's something that I think Sam Harris fundamentally fails to understand. And it's rather sad... Such a good scientist should care more about the facts and about the logic of his arguments, but unfortunately this is a recurring theme I see among academics. When it comes to economics and solutions to economic problems, the whole lot tends to be blind and ignorant... I don't really understand why, except to suggest that it's the fault of academic economists themselves. That's just a hunch, but it seems that their decades of physics envy has produced a set of highly-twisted beliefs and denials of basic logic, and their peers in other fields are too interested in authority and not enough in studying the subject themselves to realize they're being duped by bad ideas.

Just a hunch though...

Regardless, the main point is this: Free markets produce the greatest amount of real wealth for the greatest number of people. America is not, and hasn't been anything close to, a free market for a very long time... But if we would return to a free market system, and if we would stop manipulating the economy through fiat money and fractional reserve banking, we would grow the economy sustainably, and produce jobs and wealth for many more people.

Now... Perhaps this would happen a slightly lower rate than the herky-jerky booms & busts do, but we also wouldn't have the severe contractions when all of that goes haywire either. For all the complaints about the frequent "recessions" that occurred before the Federal Reserve - every single one of them was a result of a fiat credit expansion, but because there wasn't a central bank and public policy levers propelling those expansions to the levels we see today, the typical recession was in and out in under a year.

Compare that to the current one, or the ones in the 80s, the 70s, or of course, the Great Depression. Each was a result of credit expansion, and each was far more severe than virtually any example you'd find without a central bank. Funny, isn't it?

Summary

So, let's review, cause this was ridiculously long.

• Sam Harris is right on some issues. There are, indeed, problems in the United States which need to be addressed in:
• Education
• Infrastructure
• Poverty... and
• The wealth gap - although Harris clearly means the "money" gap.
• Sam Harris is utterly incorrect to conclude that the solution to all those problems is as simple as "raise taxes on the rich" or even to expand philanthropy.
• More spending on social programs like welfare and anti-poverty initiatives do not necessarily - and certainly has not, historically - resulted in lower rates of poverty. To the contrary, higher spending has resulted in diminishing and even negative returns.
• Raising taxes will not necessarily - and has not, historically - produced higher revenue. Higher tax rates have negative economic consequences, such as reduction in economic output and higher rates of unemployment consequent to lower levels of production, and that coupled with a change in the behavior of those being taxed produces no higher revenue as a percent of GDP than lower taxes - and because GDP is lower, the overall nominal revenue generated is less.
• We don't have an increasing "wealth" gap, as that would mean that more of the world's "stuff" is kept out of the hands of the poor and in the hands of the rich - which is patently untrue, but we do have an increasing "money" or wage gap. However, that gap isn't produced or even very much effected by top marginal tax rates, but rather is most directly produced by the fractional reserve banking system.
• Complaining about the specific consumption of private individuals like Ralph Lauren's multi-million dollar car collection ignores the results of that consumption. Namely that Lauren is transferring large portions of his personal monetary fortune into the hands of much poorer producers of the cars themselves as well as the producers of services that he needs to maintain and use the collection. It's important not to forget that there are always secondary & tertiary effects of trade. Ralph Lauren gets many cars which he values, and in exchange many hundreds or thousands of people get shares of the millions of dollars spent on their products & services. It is most emphatically not a case where Lauren is benefiting at the expense of anyone else.
• Higher spending in education is very unlikely to lead to better results in international educational rankings. The US already spends more per student on education than any other country, while our rankings remain painfully average. Complaining about spending misses the point of what's wrong with the system.
• Harris desires "redistributionism", but such an activity ultimately serves no valid purpose, as it hasn't - and won't - help the poor, the education system, or substantially impact the wage gap; whereas it is fairly likely to do significant damage to the economy in the form of lowered output and producers fleeing the United States in favor of more desirable locations.
• Harris underestimates the role individual choice plays in economic success. Most academics and other non-entrepreneurial types do.

Then, I followed up my nay-saying with explanations of the real causes of Harris' list of problems, and suggested how to fix them.

• The Federal Reserve, fiat money and our fractional reserve banking system is primarily responsible for the increasing gap in wages/incomes, as well as the growing cost of living through inflation and the boom & bust cycle which harms us all, contributes to the misallocation of resources and produces volatile periods of high unemployment when unsustainable activities finally need to be cleared from the market. Returning to a sound money system would reduce the wage-gap, increase standards of living for everyone and stabilize/increase the purchasing power of our currency - this would greatly help the poor.
• Increases in government spending make us poorer because the money must first be taken from the productive sector and consumed, because it typically lowers real GDP substantially, and because the government has no way to effectively calculate economic decisions - thus resulting in a loss (of around 20%) in economic output rather than any gain. Government spending also tends to crowd-out, and off-set any consumer spending.
• Poverty is best solved by the sustainable, long-term economic growth produced by a free market, not by welfare or charity. People need jobs and access to cheap goods & services to increase their standard of living, both of which are produced by productive entrepreneurs, markets & competition. Side-note: The middle class was created during a period of high levels of economic liberty in the US. Economic liberty = opportunity.
• Education is probably going to be fixed by looking at the successful models around the world which offer more competition among schools, more choices for parents and more local control over curriculum by teachers over distant bureaucrats.

So that's that.

I don't disagree with many of Sam Harris' basic moral views, and I certainly don't disagree with his assessment of what is wrong. But he is, sadly, almost entirely incorrect on why those things have happened and thus his conclusions regarding what to do about them are very confused. The problem isn't rich people keeping what they earned, and the problem isn't even - generally - "greed".

The irony is, if you want a smaller wealth-gap for any reason - even if you're just envious - then you actually adopt free market practices. People who make bad choices in a free market - as many banks did in the run up to the on-going financial crisis - get punished by the market by experiencing losses. Government bailouts of those companies only occurs in an un-free market like ours. But it's most important to understand the relationship between our banking system and the underlying, structural problems with our economy - from the gap in incomes to the boom & bust cycle that we've all been so painfully enduring.

Look at the system itself, and you will find real cause & effect. 

It's disheartening to me to see high-level scientists who are so ignorant of economics, because it leads them to make authoritative statements about the world based on views and premises that are simply false. So, if Harris ever reads this, I have one piece of advice: Care about the true empirical evidence (not models), and logical arguments as much in economics as you assuredly do in neuroscience.

And by the way... Happy New Year, everybody!