December 2012 – The Lit Fuse

The United States of Insolvency, part 4: Unfunded Liabilities

Dec 282012

In part 3 of this series, we showed that our government owes somewhere around $20 trillion in debt from various sources. This number is growing rapidly as they continue to spend more than they get in revenue — the deficit.

$20 trillion sounds like a lot of money, and it is, but there is an additional problem – unfunded liabilities. Unfunded liabilities are what the government has promised to pay for in the future, but does not have money set aside to make those payments. The largest parts of the unfunded liabilities are Social Security, Medicare, and Medicaid, which is split between the Federal and State governments. Current credible estimates for the money needed to cover these liabilities include 86.8 trillion dollars* and 122 trillion dollars**. A precise number can’t be determined because the actual cost of the programs depend on future projections.
* From a recent Wall Street Journal article, “Cox and Archer: Why $16 Trillion Only Hints at the True U.S. Debt”. Their $16 trillion figure does not include state, local, and structural debt.
** From The US Debt Clock

Liabilities are expressed in net present value. Net present value is a calculation of how much money would be needed in today’s dollars to cover payments over time in the future, so it’s a lot like having a debt and calculating the monthly payment. The cost of social programs such as Social Security and Medicare are not fixed, since they vary according to political choices, and even random events, but they can be estimated using past data as a model. The future projections used to get the $86.8 trillion and $122 trillion estimates are for 75 years, meaning what we would need in cash today to cover the expenses in these programs for the next 75 years. Going between some of the estimates, let’s use $100 trillion as the amount needed – five times the current total debt level of $20 trillion.

Let’s go back to our fictitious example of Joe, who makes $25,000 a year but spends $24,000 a year and is already $200,000 in debt. Now we add a new and more serious problem – Joe’s parents are retiring, and don’t have enough in savings, so Joe has promised to pay a portion of their expenses for the rest of their lives. Unfortunately, Joe is already spending more than he makes, and has nothing in his own savings account to cover his parents’ expenses. Joe’s accountant explains that to cover these expenses for as long as his parents are expected to live, Joe would need a million dollars in the bank today. Joe’s debt is $200,000, but when you add his unfunded liabilities Joe’s on the hook for more like $1,200,000 – unless he chooses not to keep his promise to his parents.

There’s the escape clause – in theory, the government could choose to lessen or even stop paying Social Security, Medicare, and Medicaid, just as Joe could choose not to pay the promised share of his parents’ expenses. In practice, this is nearly impossible. People have come to depend on these programs to survive. By itself, Social Security doesn’t provide a standard of living too much better than bare subsistence. Lowering its benefit value in any substantial way would almost certainly push those without hefty retirement savings into abject poverty or worse, homelessness and death. Does anyone think that today’s young generation is going to assume the burden of taking care of their elders in large numbers? If not, what happens to them? Do we let people die in the street?

Lowering the cost of Medicare or Medicaid is also an extremely difficult proposition. Under the current health care system, we have little to no control over medical costs, which are increasing more rapidly than the official rate of inflation. We have some uncomfortable and difficult choices to make, but so far, people have shown little appetite for such changes. Unless health care in the United States is overhauled completely in a way that controls costs, the unfunded liabilities that relate to it will remain. The longer they remain, the more money we spend that we don’t have, and the higher the debt will go.

Imagine we do nothing and the unfunded liabilities actually do have a net present value of $100 trillion. This would mean that our current debt is really $120 trillion instead of $20 trillion. If it isn’t possible to pay $20 trillion, how can we pay $120 trillion?

The United States of Insolvency, part 3: The Debt

Financial No Responses »

Dec 272012

What is the national debt?

In the last article, we explained the deficit – the amount the government spends in excess of what it receives in revenue. Year after year, the deficit adds to the debt. The government has run sizeable deficits since Ronald Reagan became president*, and the debt has piled up year after year.
* Some incorrectly state that president Clinton did not run a deficit for part of his presidency. Unfortunately, he did run a constant deficit in the hundreds of billions or more even though the official numbers showed a surplus. The government used accounting tricks such as off-budget spending to hide large amounts of spending; see this article for details.

How much is this debt at this time?

Borrowed Federal money adds up to around $16.4 trillion dollars. States collectively owe somewhere around $1.1 trillion, and local entities such as towns collectively owe around $1.7 trillion, for a total of $19.2 trillion. Add to this the structural deficits – federal, state and local governments are all delaying maintenance on roads, bridges, and other structures, and it ends up somewhere around $20 trillion.

Consider how much money this is. In a previous post, "Who pays"?, we examined who pays taxes and how much. In 2009 there were 141,458,638 tax returns filed. For 2012, let’s round that up to 150 million. If we divide this $20 trillion equally among all 150 million tax filers, it would be $133,333.33 for each – an almost mortgage-sized debt. Paying this off in 30 years, at only 2% interest, would require each and every taxpayer to pay $492.83 a month. This is more than many low earners’ take home pay, so it wouldn’t work.

Next let’s try shifting the debt repayment up to those who could more afford such a payment – those making $50,000 a year or more. There are only about 50 million such taxpayers, so now the debt per taxpayer would be $400,000 – a large mortgage-sized debt. Paying this off in 30 years at only 2% interest would require those making $50,000 or more to shell out $1,478.48 a month. A person making $50,000 would be losing about a third of their gross income, and closer to half of their current take-home pay. This wouldn’t work either – it’s too much of a burden. It would reduce people’s income so much that they’d decide either not to work at all, or to take lower income jobs that would leave them with just as much money after avoiding the debt repayment.

Finally, let’s try shifting the debt repayment up to higher level earners, who make $200,000 or more. There are only about 4 million taxpayers in that category, so the share of debt each would be a whopping $5 million each. Paying this off in 30 years at 2% interest would require $18,480.97 a month, or $221,772 a year. Since that’s more than the entire income of the low end of the group, even before taxes are deducted, it obviously wouldn’t work.

Now let’s look at debt repayment from a progressive view. What if we assessed a special, graduated tax in proportion to earnings in an attempt to avoid an impossible burden on anyone? To repay the debt over 30 years, at 2% interest, we would need to pay around $74 billion a month, or $887 billion a year. The US Debt Clock lists the current tax collections for people and corporations as a total of around $1.4 trillion, so this $887 billion would require an overall tax hike of almost two-thirds.

In theory, a two-thirds overall tax hike may sound possible, but it isn’t. Studies have been done on the ability of the United States to collect taxes on its citizens. As mentioned in a previous post, "What is Progressive Taxation?", it isn’t possible to increase taxation that much. The government has tried in the past to raise tax rates significantly, and it did not result in a significant increase in revenue. In fact, if taxes are raised enough, revenue begins to decline. This is from factors such as people hiding or shielding their income, or even removing their money from the economy entirely as “tax exiles”. In addition, significant increases in tax rates cause businesses to fail and close, which removes both the business’ and its employees’ incomes from the economy.

The deficits are still so high that the debt is growing rapidly. Let’s scale the debt down to our fictitious example of Joe, who makes $24,000 a year after taxes but is spending $34,000. The $20 trillion in debt built up is like Joe having $200,000 in debt – more than eight times what he brings home in a year! That would be bad enough by itself, but before Joe could even begin dealing with his debt problem, he would need to cut his spending significantly. The majority of the citizens of the United States are not showing any will to cut spending, so imagine that Joe simply refuses to spend less, and in fact, starts to spend more!

Worst of all, that $20 trillion and counting in debt is only the beginning of the story. The next post in the series deals with unfunded liabilities – what the government has promised to pay for, such as Medicare and Social Security, but does not have enough money set aside to pay the projected amounts.

The United States of Insolvency, part 2: The Deficit

Financial No Responses »

Dec 272012

What is the deficit?

The word deficit goes along with the word deficient. When more money is being spent than received, the received amount is deficient; the deficit is the amount of money spent in excess of what is being received. For example, let’s say Joe has an after tax income of $400 a week ($20,800 a year, or about $1,733 a month). He has these basic monthly expenses:

Rent: $900
Utilities: $400
Car payment: $400
Gasoline: $200
Other: $200
Total: $2,100

Joe needs to pay about $367 more than he is taking home. His annual deficit is $20,800 – ($2,100 * 12) or $4,400. Since he can’t make his obligations, he starts to borrow money — first from friends, and then Joe gets several credit cards and starts charging some of his expenses. His debt level starts to build up and he has to make payments on the debt, which increases his expenses and thus his deficit gets larger. He realizes that at some point, he’ll run out of credit – becoming insolvent – and will have to face the consequences.

Joe’s scenario above is in many ways the same as the US government’s. The major difference is that Joe would likely do something about his problem. Maybe he would get a second job to increase income, or maybe he’d move to a cheaper apartment and go without cable TV to reduce his expenses. Instead, the US government just keeps on spending, spending, and spending some more, as if it doesn’t matter that there’s a deficit. The debt piles ever higher and they begin to resort to dangerous tricks to keep things going. Currently, the deficit is estimated to be around $1 trillion dollars, meaning, the government will spend $1 trillion more than they get.

There’s a second deficit as well, which we call the trade deficit. The United States imports a lot more goods than it exports. Exports generate revenue for the US economy, and imports cost money from the US economy, so the net effect is that the United States is losing money every year. Currently, the trade deficit is estimated to be around $750 billion dollars, meaning, the US economy will lose $750 billion dollars by spending that much more on imports than we get for our exports.

Finally, there is a third deficit: the government delaying maintenance on infrastructure such as roads and bridges so that the decay is greater than the maintenance. As the condition of the infrastructure worsens over time, it will cost more and more money to bring things back into good condition. It is difficult to make a good estimate of this deficit, but with more than 700,000 bridges and almost 4 million miles of roads, it is a high number by itself. Overall, only about half of all roads are in good condition, and 11% of bridges — almost 70,000 in total — have been rated as structurally deficient.

It’s difficult to make any sense of such large numbers. A trillion dollars? A thousand billion? A million million? It’s so far removed from anything we’ll ever earn or process that it seems like just a number. A good way to make the numbers easier to understand is to reduce them in size and apply them to a single person or company.

The US Federal government took in about $2.4 trillion dollars in revenue in 2012. This was from income tax, employment taxes, business taxes, estate taxes, and a few others that they collect. Let’s divide by 100 million to reduce the numbers to Joe’s level — $24,000 of after tax income, or about $2,000 a month. With a deficit of around $1 trillion, The government will spend about $3.4 trillion for budgeted items*. This is the same as Joe spending $34,000 a year, or $2,833 a month — $833 a month higher than he earns, racking up $10,000 in debt a year. In just two and a half years, Joe would be $25,000 in debt – equal debt to what he makes in a year.
* The US government uses various accounting tricks to hide their spending, such as off budget spending, so the real deficit is actually much higher than they admit. The US Post Office, for example, is not counted in the budget, even though it is paid for by the Federal government.

Next let’s add the second deficit to Joe’s problems — his company is spending more to pay its employees and buy its parts and materials than it is making selling its products — $7,500 a year more. The company is saying that it will need to reduce salaries to return to profitability, which will make Joe’s problems even worse.

Finally, let’s add the third deficit. Joe is so low on money that he isn’t performing the normal periodic maintenance on his car. He’s going a lot of extra miles between oil changes, he hasn’t rotated his tires, and he’s not changing his radiator fluid or doing tune-ups. Eventually, this will catch up with him in the form of either a major repair bill or worse, he will need to purchase a new car much earlier than expected.

Imagine the reaction of Joe’s friends if they found out what he was making, what he was spending, and the rest of his circumstances. They’d clearly recognize that he was on a collision course with reality and they would probably try to stage an intervention for Joe before it was too late.

Even if the US government were to get the deficit under control, which they won’t, we would still be in some very serious trouble with the debt already accumulated. The next post in this series expands on the debt.

The United States of Insolvency, part 1: Introduction

Financial No Responses »

Dec 272012

Insolvent: adjective
1: unable to pay debts as they fall due
2: having liabilities greater than the market value of assets held

The United States government has racked up massive debt by spending far more than its revenues. Like a person with a limited income and bills to pay, if the debt grows large enough, the government will be unable to pay the interest on the debt and will therefore be insolvent.

This series of posts addresses these questions:

These are all very important questions. It is my opinion that insolvency is already unavoidable except by means that will be an even greater disaster, such as hyperinflation.

To see some of the numbers involved in this series in realtime, along with some past years and estimates of the future, see the US debt clock.

What is Progressive Taxation?

Financial No Responses »

Dec 262012

Sales tax is, in most cases, a proportional or flat tax. For example, in Massachusetts, the sales tax rate is 6.25% on taxable transactions. It does not matter if you purchase a $5 item such as a hockey puck or a $25,000 item such as a car; the rate is the same, and the tax increases in proportion to the price.

In the United States, the Federal income tax is called progressive. The term seems to indicate that it is a positive thing, but the word progressive means that the tax rates progress, or move higher, as income increases. For example, in 2012, single taxpayer incomes up to $8,700 are taxed at 10%, while incomes above $388,350 are taxed at 35%. Here’s the complete table:

US Federal income tax rates for 2012

Tax rate	Single filers	Married filing jointly	Married filing separately	Head of household
10%	Up to $8,700	Up to $17,400	Up to $8,700	Up to $12,400
15%	$8,701 – $35,350	$17,401 – $70,700	$8,701- $35,350	$12,401 – $47,350
25%	$35,351 – $85,650	$70,701 – $142,700	$35,351 – $71,350	$47,351 – $122,300
28%	$85,651 – $178,650	$142,701 – $217,450	$71,351 – $108,725	$122,301 – $198,050
33%	$178,651 – $388,350	$217,451 – $388,350	$108,726 – $194,175	$198,051 – $388,350
35%	$388,351 or more	$388,351 or more	$194,176 or more	$388,351 or more

A common myth of the progressive tax system is that you can lose money by moving in to a higher tax bracket. In fact, only the income that falls into a bracket is taxed at that rate. For example, a single filer with income of $50,000 would have the first $8,700 taxed at 10%, the next $26,650 taxed at 15%, and then the rest taxed at 25%.

One can argue both for and against progressive taxation.

Progressive taxation is a form of income redistribution – a way to make higher earners pay a larger share of the tax burden, to fund government programs that benefit lower earners, or in cases such as the earned income credit to give money directly to lower earners. There are those who argue that this is morally correct, and there are those who argue that it is unfair. Both arguments are valid – progressive taxation is both morally correct, and unfair, at the same time. The tricky part is maintaining a reasonable balance so that the unfairness does not exceed the moral correctness by too much. Tipping too far in one direction, the less fortunate live in misery and squalor, their life expectancies far lower than they should be. Tipping too far in the other, the higher earners are taxed to the point where it can be considered robbery and they will rebel.

From a purely pragmatic point of view, there are both benefits and risks to progressive taxation. Progressive taxation tries to raise the outcome for the less fortunate without causing too much pain for everyone else. Living in a smaller mansion is a lot less painful than a low income person not being able to afford food or heat. If the government were to adopt a proportional tax system, low earners would be crushed by the tax increase. There is no question that the progressive tax system we have raises the standard of living of the lower earners a great deal, and also allows the government to enact some useful social programs that they would not be able to afford otherwise.

One risk of progressive taxation is obvious to anyone who has played the game “Sim City”: when taxes increase too much, revenue actually begins to decline. There are many ways to structure businesses or income to shield them from taxes, and the incentive to do so increases as taxes increase. More importantly, the world is a smaller place than it has ever been, meaning it is more globally connected than ever. Those with enough money can live anywhere they want in the world, so when their taxes are increased enough, they can pick up their money and leave. Many famous inventors, entrepreneurs, artists, and musicians have become “tax exiles”, emigrating to a country with a more reasonable tax structure to protect their wealth from what they consider to be confiscation by excessive taxation. A similar effect occurs with business taxes, especially in today’s global market. Many businesses can locate almost anywhere in the world with little difficulty. Hauser’s Law was created from long study of the US economy and states that the government can only collect approximately 19.5% of the US GDP*; attempting to raise rates higher does not increase revenues. Again, this is much like the Sim City tax rate problem.
* GDP (Gross Domestic Product) is the estimated market value of all goods and services produced within a given time, usually a year. Some calculate it by saying it’s the amount of income everyone (including businesses) earned in a year. Others use a formula such as GDP = private consumption + gross investment + government spending + exports – imports.

There is also a psychological factor – the perception of injustice. There have been studies done which attempt to test the effects of various economic models. One interesting method is called the “Ultimatum Game” (more info at Ultimatum_game on Wikipedia). Two players are shown a sum of money to divide. One player gets to decide how the money is divided, and the other chooses to either accept this offer, or reject it, leaving both players with nothing. Players who offer less than 20% often find that the other player rejects the offer, leaving both with nothing. This isn’t a logical choice, since something is better than nothing, and says a lot about human nature and our sense of justice. The players rejecting low offers feel it is worth receiving nothing to punish the player who offered them an unjust share, and they don’t act in their own best interest. This must be a consideration for imbalance in either direction of the tax system. The rich can leave a country, or hide their income, or just give up, but the poor can end up feeling they have nothing to lose and thus become violent and attempt to seize wealth by force. There’s also the legend of Robin Hood to consider. Robin Hood was a thief and highway robber, but he was a hero to the poor, who were oppressed by excessive taxation.

Those who consider all taxes bad, no matter how small and inconsequential, are heartless and selfish. Those who consider all taxes good, no matter how burdensome and unfair, are just as heartless and selfish. They just have a different perspective.

To summarize:

Progressive taxation means that higher income people pay a higher rate of taxes than lower income people.
Some level of progressive taxation is needed to run a compassionate government, with a decent standard of living for everyone.
Maintaining a reasonable balance is critical to the proper functioning of the tax system.
It is also necessary to balance the morality of income redistribution with the unfairness of it.
Increasing taxes too much on lower earners will push them into misery and squalor.
Increasing taxes too much on higher earners will not increase revenues, and can even decrease them.

Those who say, “The rich can always pay more!” are just as wrong and harmful as those who say, “Who cares about the poor?”

Who Pays?

Financial 3 Responses »

Dec 262012

I hear a lot of grumbling about taxes, most especially about people and business paying their “fair share”. It is important to know who is paying taxes, and how much. Some of those numbers are easy to come by, some are hard, and some are impossible to even estimate. Let’s focus on who pays US Federal income taxes and how much they pay, since those are the easiest numbers to get.

The best place to go for US Federal income tax statistics is the IRS, as income tax returns are the best source of accurate information. Unfortunately, the IRS has not posted much information since 2009, and complete information on business taxes after 2003 is not available. They cite that the years 2004-2008 are “under review”, which likely means there are political or other unknown reasons for not releasing the information; no reasonable review could take that many years. Still, the numbers tell us a lot. First, let’s look at taxes on individuals, meaning people and their families:

Federal income taxes on individuals (2009 data)

	All incomes	Less than $50,000	$50,000-$74,999	$75,000-$99,999	$100,000-$199,999	$200,000 or more
Number of returns	141,458,638	93,832,822	18,759,162	11,419,877	13,516,673	3,930,104
*Total of AGI (billions)**	$7,801	$1,892	$1,153	$987	$1,800	$1,969
Total taxes (billions)	$968	$95	$95	$94	$232	$450
Ratio of AGI to taxes	12.41%	5.03%	8.29%	9.53%	12.91%	22.89%
Group % of total Fed tax	100.00%	9.83%	9.88%	9.72%	24.00%	46.57%
Tax per return in group	$6,843	$1,014	$5,098	$8,238	$17,190	$114,715
Group % of tax returns	100.00%	66.33%	13.26%	8.07%	9.56%	2.78%
Group % of total AGI	100.00%	24.25%	14.78%	12.65%	23.08%	25.24%

* AGI – Adjusted Gross Income. Gross income is all your income added up from all sources (wages, tips, gambling winnings, etc.). Adjusted means certain allowed items are subtracted, such as pre-tax retirement contributions or alimony payments. AGI is not the same as taxable income, because exemptions and deductions are subtracted from AGI to calculate taxable income.

If you made more than $112,124 you were in the top 10% of AGI. If you made more than $343,927, you were in the top 1% of AGI.

If we look at the above table, we can see some interesting facts for 2009:

Individuals earned nearly $8 trillion dollars and paid nearly a trillion in US Federal taxes – about an eighth.
The bottom two-thirds of all tax returns earned about a quarter of all the income, but paid less than 10% of all US Federal taxes.
The top third of all tax returns earned about three-quarters of all the income, but paid more than 90% of all US Federal taxes.
The top eighth of all tax returns earned about half of all the income, but paid about 70% of all US Federal taxes.
The top 3% of all tax returns earned about a quarter of all the income, just like the bottom two-thirds, but they paid about half of all US Federal taxes – nearly five times as much as the bottom two-thirds paid, as a group.

Businesses also pay a significant amount in taxes. For 2003, we have:

Business taxes (2003 data)

Number of returns	27,486,690
Net income (billions)	$1,953
Taxes paid (billions)	$471
% of income to taxes	24.12%

Businesses made more money in 2009, but there is only tax information for corporations:

Corporations (2009 data)

Number of returns	5,824,545
Net income (billions)	$919
Taxes owed (billions)	$205
% of income to taxes	22.31%

If we use the business numbers that are available and plug in the corporate tax rate for 2009, we can make a guess:

Business taxes (2009 data, with estimated taxes)

Number of returns	31,607,710
Net income (billions)	$3,133
Taxes paid (billions)	$699
% of income to taxes	22.31%*

* This is a guess, using the corporate 2009 tax rate. 2003 shows a higher average tax rate.

Individuals paid $958 billion in US Federal income tax, while (if we accept the guess above) businesses paid $699 billion. Businesses paid somewhere around double the tax rate that individuals paid.

As you can see from these tax rates, people who earn more money are taxed at a much higher rate and pay far more of the taxes each. This is labeled “progressive”, and the United States has one of the most progressive tax systems in the world*, especially when refundable tax credits are included.
* See the book, “Growing Unequal? Income Distribution and Poverty in OECD Countries”

When I hear people saying, “The rich need to pay their fair share!” I like to show them these facts. The rich are paying far more than their fair share. This will be examined in a later post, since “unfair”, “morally incorrect”, and “detrimental” are not the same thing — something can be unfair, but morally correct and beneficial at the same time.

Avoid waging class warfare, for if it were to succeed, we would all be equal in misery and poverty.

In Defense of Capitalism

Sociopolitical No Responses »

Dec 202012

Capitalism is the reason for our prosperity. Yet today, it is under attack for various reasons.

Since I very strongly believe in capitalism, I’ve had some very strong arguments with people who have disparaged it. Usually I start by addressing whether they understand what capitalism actually is, because sometimes they are confusing it with something else such as oligarchy, or attaching things to it that do not belong. If I determine that they do, in fact, understand what it is, then I move on to asking them what they’d replace it with. Wikipedia has some excellent wording for these, so let me use theirs:

Capitalism is an economic system…There is general agreement that elements of capitalism include private ownership of the means of production, creation of goods or services for profit or income, the accumulation of capital, competitive markets, voluntary exchange and wage labor.

Oligarchy is a form of power structure in which power effectively rests with a small number of people. These people could be distinguished by royalty, wealth, family ties, corporate, or military control. Such states are often controlled by a few prominent families who pass their influence from one generation to the next.

Assuming agreement that these definitions are reasonable, it is evident that they are very different things. Capitalism is not a form of government, though it has a heavy influence on how any government is formed and operates. You could have a capitalist democracy, a capitalist republic (such as the USA), a capitalist oligarchy, or even a capitalist monarchy. Perhaps you can also see why many people confuse the two, because in any system of economics or any form of government there will always be greedy, evil people who have little or no compassion and therefore will attempt to use whatever system is in place to exploit others. People see exploitation in capitalism, and they assume that because capitalism is only about economics, it somehow sanctions or even encourages exploitive or ruthless behavior. But examine again the definition above. Pure capitalism says that:

I can own private property, such as clothing, houses, cars, or piles of gold.
I can own a business, direct that business, and make a profit from that business.
Money is a system of exchange. I can accumulate and own sums of it.
I cannot be forced to buy or sell – it is my right to choose whether or not to.
If I perform labor for others, I am paid for it. The amount of pay is negotiated between me and the payer.

There’s nothing in pure capitalism that creates a government or sets policies on almost any aspect of life except establishing money and certain rights that we have to our own life and property. Is there anything in that list that is immoral in any way? Surely no one thinks that private property is immoral or that using money as a form of exchange is immoral. Usually at this point someone says something like, “Well, capitalism doesn’t contain anything about charity! What about my disabled neighbor?” My response is to reiterate that it is an economic system, not a system of government. Charity is not an economic function — it is for individuals first, charitable organizations second, and finally for government. I will say more on this later.

An oligarchy, on the other hand, means that a small number of people who have acquired power — usually by making money — make the rules, and control others’ lives. Some claim that the USA is moving towards becoming an oligarchy, and while we can argue about the degree to which this is happening, it can’t be denied that having large amounts of money does constitute a significant political advantage, especially since election campaigns are so dependent upon large streams of financial contributions. Most full-time politicians can only pursue a career in politics because they have enough money, and it is unusual for anyone of limited means to make a serious entry into politics today. That wasn’t so true in Abraham Lincoln’s time, but it certainly is today, enough so that in my opinion it can be called a form of corruption. It’s a fairly significant flaw in our current form of government, which is a republic, and some fixes to push back on it are desperately needed. The problem is that so many people assume that this corruption is a natural end of capitalism, when in fact corruption is only a natural end of ambition. While it is true that capitalism has facilitated this flavor of it, every society we’ve seen in history has had some form of it from monarchies to communist states where no one owns any private property. Capitalism is not a license to do harm; it’s a blueprint for economic exchange that promotes competition. Competition is a necessary component of a stable, sustainable economic system among humans, and history has proven this to be true over and over again. Even if one denies human nature, the same thing is true in the animal kingdom. Animals compete with each other. I believe that competition is inseparable from the desire to live and thrive that is a necessary component of any living being. Competition, however, does not mean ruthlessness. Ever see a sports game where someone cheats or behaves poorly to win at any price? That kind of play does not bring respect or adulation and no one can reasonably claim that the competitive nature of sports makes such bad behavior necessary. Properly framed, business can be called a sport, and one can play with good sportsmanship or poor sportsmanship. One can play honestly, or one can cheat. The bad behavior is not caused by the nature of the game — it is caused by degrees of evil in the heart of certain players.

In the same way as there are good and bad sports players, there are good capitalists and there are bad capitalists. Good capitalists treat their employees fairly, compete honestly, and win by making the best products or services for consumers. Bad capitalists exploit their workers, lie, cheat, steal, and win by sabotaging others or taking shortcuts such as knowingly putting out unsafe products or services. Both good and bad behavior are possible in capitalism because it’s just a system of economics. It’s not a comprehensive moral code and wasn’t meant to be.

Now let’s examine what we use as other systems of government. When we revoke some of the tenets I’ve laid out above, you get socialism or communism. Again, from Wikipedia:

Socialism is an economic system characterized by social ownership or control of the means of production and cooperative management of the economy, and a political philosophy advocating such a system.

At least part of the right to own private property is still retained, but you can no longer truly own a business to make profits from that business. You can be forced to buy or sell, and government sets prices and wages. This can sound very attractive to people, and socialists are able to paint a lovely picture of it. They point to abuses of bad capitalists and explain that those will be a thing of the past as government will set the terms of employment, wages, and prices, ensuring that everyone will be treated well. They point to the rich, and by exploiting people’s inherent jealousy, convince people that it’s unfair that anyone is rich. It’s a seductive path, but here comes an old quote: “The road to hell is paved with good intentions.” What you’ve done here is reduced competition, and with it, the motivation to do well. Even worse is what I said to someone recently:

The problem with capitalism is that when it is totally unrestrained, human nature causes it to overrun government and it becomes a de-facto government where one group controls most the capital and the much of power to make laws. Justice is denied and the business owners become a ruling class, exploiting the workers.

The problem with socialism is that, by giving away power over business, one group controls most of the capital and all of the power to make laws. Justice is denied and the government becomes a ruling class, exploiting the citizens even more mercilessly than any capitalist society ever could.

Communism is even worse – all of the personal rights above are abolished. From Wikipedia:

Communism is a social, political and economic ideology that aims at the establishment of a classless, moneyless, stateless and socialist society structured upon common ownership of the means of production.

So by some means it is decided what everyone’s portion of everything should be, and in theory, everyone gets that portion. It doesn’t matter what they do, or don’t do. Everyone gets the same quality of housing, everyone gets the same quality of food, everyone gets the same quality of furniture. It should be fairly easy to see how this can’t possibly work. People differ too much. They differ in their abilities. They differ in their ambitions. They even differ in their needs! What do you do in such a system when one person has more food than they feel they need, but less housing than they’d like? With so much freedom of choice gone, no one can feel satisfied. A black market starts up. Even worse, what motivates anyone to excel? If you would make the same money being a sculptor — whether you were good at it, or bad — as an assembly line worker, which would most people choose? I’ve had people refer to “Plato’s Republic” and tell me that the way to fix the job assignment problem is for people to take tests for the purpose of assigning them to the job they are best at. What happens when you’re not good enough at anything you actually want to do? Even if you get a job you want, what motivates you to produce? We’ve seen the effects of these and other problems in communist Russia. When they began to privatize farms, the private farms were out producing the public ones by more than a factor of ten. Some might not regard this as a problem, but then they’re not seeing the big picture. The level of efficiency drops to the point where things don’t work out well for anyone, and the only reason they work at all is because government takes on increasing amounts of power to force people into producing. This ends up being called fascism.

F.A. Hayek wrote an excellent book called “The Road to Serfdom” which discusses capitalism and competition versus socialism or communism, which always devolve into fascism. I also really like the quote from JFK in Berlin:

“Freedom has many difficulties, and democracy is not perfect. But we have never had to put a wall up to keep our people in!

No socialist or communist society in history can say the same. Central planning can never be as anywhere near as efficient as the free market. When you set price floors or ceilings, you get shortages and black markets pop up – vestiges of capitalism that leak in because capitalism is far more true to human nature. Reduced competition causes a lack of motivation to innovate or even to produce. The quality of life in general degrades, and the only way to fight the degradation is for government to step in and issue orders. For example, workers end up with demands for minimum levels of production regardless of pay, and are punished for failure. More and more power leaks into the government and eventually, society drags on the bottom with a general feeling of hopelessness as the only way to be empowered is to worm your way into the government. My favorite way to show the difference is to say:

In a capitalist society, there are rich and poor. In a socialist or communist society, there are only the poor.

It’s at this point that I’ve heard people say things like, “ ‘Star Trek: The Next Generation’ has a society that doesn’t use money and everyone is happy! That’s not communism or socialism.” Well, sure, it’s a television show. They can leave out all sorts of details, and pretend that things work that cannot possibly work, just like having transporters or time travel. If there were no money, how would goods and services be exchanged? What would motivate anyone to work in any capacity? Even then, the no money society in the Star Trek universe has episodes where the Enterprise motivates people by paying them in “gold-pressed latinum bars”, or “dilythium crystals”. Even the show’s writers couldn’t deny that people sometimes need to be paid to do things.

Another objection I often hear people raise is when they point to extreme cases of evil behavior and imply that they are an integral part of capitalism. A great example of this is the infamous incident where a memo was found detailing the cost of lawsuits from wrongful deaths due to a known defect in a manufactured automobile and comparing them to the cost of doing a recall, and recommending that since the lawsuits were cheaper, that the company not do the recall. This isn’t capitalism at all – this is evil. There’s nothing about owning private property or being able to create a profitable business or have money that means that it’s OK to allow people to die out of greed. Capitalism is an economic system, not a system of philosophy, and it does not include tenets such as, “Profit is the only consideration that matters and even human life doesn’t.” Sure, there are those who assign such tenets to capitalism because they see bad things happen and they see others misuse capitalism as a defense of their terrible actions. “Well, I was only trying to make a profit!”, a greedy murderer might say. Of the major religions in the world today, I can think of none that include a sanction for murder, yet there have been many murderers in history who have (unsuccessfully) tried to use their religion as a justification. It is the same for intolerance – look no further than Fred Phelps and his despicable church invading the funerals of gay people and holding up signs with hateful anti-gay slogans. It would be easy to use him as an example of why Christianity is bad, but then, such an example would be fallacious because it’s not the religion that is at fault. It’s Mr. Phelps and his followers and the evil in their hearts. Certainly, other systems of economics have also had their share of evil behavior. Evil exists, and always will. No system of government can prevent evil, but government can and does provide a means with which to redress it. For example, punitive damages were introduced into lawsuits to respond to cases like allowing deaths rather than doing an automobile recall because the deaths were cheaper. Punitive damages meant that each case of death could be more expensive than the recall. Justice is not always obtained, but then, no society is perfect. I think we get it right more than any historical examples I’ve seen.

Finally, there’s the issue of charity that I promised to get back to. Recently, a friend posted a graphic on Facebook by someone named Stephen Colbert that said:

If this is going to be a Christian nation that doesn’t help the poor, either we have to pretend that Jesus was just as selfish as we are, or we’ve got to acknowledge that He commanded us to love the poor and serve the needy without condition and then admit that we just don’t want to do it.

I find this disingenuous almost beyond belief, and it’s an example of why I deleted my Facebook account. “Doesn’t help the poor?” We spend massive amounts on social programs and charities aimed at helping the poor and needy. “selfish…without condition”? So does this mean that I am being selfish unless I give everything I own away, like a Franciscan Monk does? Do we even agree on who the poor and needy are? If I have less than you, or perhaps if I don’t have everything that I want, does that make me poor and needy? How do we define what poor means, or what needy means? What levels of assistance are appropriate? Most importantly, at what point does personal responsibility kick in? When there are people who are suffering due to circumstances that they caused themselves, perhaps even repeatedly, how much of a right do they have to their neighbors’ income or goods?

All of these are vital questions. Charity cannot be an economic function because of the complexity of the decisions involved. “Who deserves what?” is a very personal question and involves answers that are social and even spiritual in nature. Socialism and communism’s attraction are that they attempt to force the economy into a state where need is eliminated. They fail because human nature doesn’t work that way. No two people are likely to completely agree on an appropriate level of charity, and so we use whatever form of government we have to try to come to agreements on it. It’s a huge part of who we choose to vote for. Some might vote for Democrats because they perceive them as more charitable to the poor. Others might vote for Republicans because they believe that excessive charity drives bad behavior. Charitable organizations supplement this and individuals do, too. One could debate endlessly on what the right level of charity is, what the right methods of disbursing charity are, who deserves it, who doesn’t, and all the other characteristics of charity. The important fact is that it cannot be part of the system of economics without disastrous results. Indicting capitalism for not being charitable is a bit like criticizing a hammer for not being good at playing music CDs. We have a separate tool do to that. Same with this case; our government, which is also not part of the economic system, comes to disastrous results when it is forced to be part of it. Too much power in one group is always a mistake. Government’s entire function is the well-being of its people, and it can coexist quite well with capitalism via mechanisms such as taxation. We can disagree on how much taxes should be collected, and for what purposes, but that’s the beauty of being in a free society. We can choose to vote according to the candidates that seem to best fit our principles.

To those who are attacking capitalism: When we forget and abandon the values and methods that made us prosperous, we will ultimately lose that prosperity.