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Source link: http://archive.mises.org/9031/larry-summers-heavyweight-centrist-or-lightweight-leftist/

Larry Summers: Heavyweight Centrist or Lightweight Leftist?

November 30, 2008 by

A recent New York Times article provides two significant pieces of information about Larry Summers, the man designated by President-Elect Obama to be head of the National Economic Council and, as such, according to The Times, “his lead economic adviser inside the White House.” (David Leonhardt, “The Return of Larry Summers,” November 26, 2008, p. B1.)

First, The Times’ article informs its readers that Summers, a former Secretary of the Treasury under President Clinton, and later President of Harvard University, so impressed Henry Kissinger that years ago “Kissinger suggested that Mr. Summers be given a White House post in which he was charged with shooting down or fixing bad ideas. Mr. Summers’ loyal protégés — Timothy Geithner, who beat him out to become the next Treasury secretary; Peter Orszag, the next budget director; Sheryl Sandberg, the chief operating officer of Facebook; and others — say that Mr. Summers can make them smarter in ways that almost no else can.”

The second significant piece of information provided by The Times’ article describes the nature of Mr. Summers’ own ideas. It describes how “His favorite argument today…goes like this: To undo the rise in income inequality since the late ’70s, every household in the top 1 percent of the distribution, which makes $1.7 million on average, would need to write a check for $800,000. This money could then be pooled and used to send out a $10,000 check to every household in the bottom 80 percent of the distribution, those making less than $120,000. Only then would the country be as economically equal as it was three decades ago.”

The Times’ reporter has apparently known about Mr. Summers’ redistributionist ideas, as well as his closeness to Mr. Obama, for at least a year and a half. As a professional journalist, he had a moral obligation to share such important knowledge with the general public. But he, and many others, similarly so informed, did not bother to do so. Instead, even in the face of the substantial public upset in connection with the question about redistribution posed to Mr. Obama by the now famous “Joe the Plumber,” they chose to remain silent.

They personally favored the election of Mr. Obama and his ideas on the subject of redistribution. Badly lacking in professional standards and personal morals, they placed their own political agenda above their professional obligation to inform the public about a matter vital to an intelligent decision as to how to cast its ballots.

And now, when they openly describe the redistributionist egalitarianism of Mr. Summers and, implicitly, Mr. Obama, they try to make a far-left agenda more palatable by depicting these gentlemen as belonging to the “center” of the political spectrum.[1]

Summers apparently does not see, or if he does see, does not care, that in presenting his proposal for redistribution, what he is urging is armed robbery on a massive scale. That is the essence of any policy of “redistribution,” whether advocated by Summers and Obama or by Lenin, Stalin, or Mao.

For what is going to make each of the top 1 percent of income earners pay an extra $800,000 in taxes? The only thing that would make them pay it is fear of being arrested and imprisoned. And who would arrest and imprison them? Armed thugs wearing the uniforms and badges of officers of the United States Government, who would give them no other choice but to pay the money or be hauled off to jail and clubbed or shot if they resisted. (What a total perversion this would be of what the United States Government once stood for: a transformation from an institution designed for the protection of individual rights into a gang of bandits massively violating individual rights.)

How would this differ in any essential respect from those who are to receive the loot, in the form of $10,000 checks, taking matters into their own hands and simply robbing the homes and businesses of the top 1 percent of income earners to the extent of $10,000 each? They would give the homeowners and businessmen the same choice, of their money or their lives.

And why should it stop at $800,000 in extra taxes and $10,000 each for the looters? If the economic inequality represented by that $800,000 per capita of the top 1 percent of income earners must be done away with, why should not all economic inequality be done away with? Why not make everyone an equal owner and equal income recipient, i.e., why not go straight for communism? That’s the logic in what Summers is advocating.

Not only is Summers advocating the kind of evil committed by criminals, but he also displays a degree of lack of thought that is often found among criminals.

One of the implications of his proposal is that an individual who increased his earnings by just one dollar could be liable for an additional $800,000 in taxes. Based on the most recent available data, which are for 2006, an individual who increased his earnings from $388,806 to $388,807 would thereby be thrust into the top 1 percent of income earners and thus be made subject to the $800,000 of additional taxes urged by Summers. This, of course, would leave such an individual with an after-tax income of minus $411,193. (In addition, of course, all of the ordinary income taxes for which he would be liable at that level of income would also have to be subtracted, throwing him still further into Summers’ Alice-In-Wonderland world of negative after-tax income.)

Summers is probably unaware of this, because he appears to focus on the $1.7 million average income of the top 1 percent of income earners. This enables him to ignore all the below-average incomes of members of that group that would be rendered negative on an after-tax basis if his scheme were imposed.

A proposal this hare-brained makes Summers come across more as an intellectual lightweight than as any kind of brilliant thinker able to identify the errors in others’ thoughts.

There is actually a reason for Summers’ advocating a scheme that implies negative after-tax income for many upper income taxpayers. That’s the fact that that is what is necessary to make it appear that redistribution can constitute any kind of significant gain to large numbers of people. If one rules out taxes that imply negative after-tax income, and also taxes that serve to reduce the demand for labor or capital goods, it turns out that there is very little to “redistribute.”

First of all, all of the wealth of businessmen and capitalists that is in the form of capital (which in the case of large businessmen and capitalists, is almost all of their wealth) already benefits the entire population. It does so by virtue of serving to produce the goods and services that everyone buys and by virtue of constituting the source of the demand for the labor that wage earners sell.

The wealth of Exxon, General Motors, Dell, etc., is in the means of production that bring gasoline and heating oil, automobiles and SUVs, computers and monitors to the masses. Their wealth and that of all other firms is also the source of the demand for the labor that wage earners sell. Thus there is a twofold general benefit from privately owned means of production: the benefit to the buyers of products and to the sellers of labor.

Exactly the same is true of profit and interest income and of capital gains and inheritances to the extent that they are saved and invested, which, in the case of large incomes and inheritances is overwhelmingly the case as a rule. The only special benefit of the businessmen and capitalists, i.e., the only benefit that they obtain which the non-owners of the means of production do not obtain, is the additional personal consumption that their wealth makes possible, plus the satisfaction of knowing that if necessary they could consume their wealth.

The truly personal consumption of businessmen and capitalists is insignificant in the scheme of things. For Warren Buffet, the world’s richest man, it appears to be on the order of an extra ice-cream soda per billion dollars of additional capital accumulated, plus mosquito nets to fight malaria in Africa. The few dozen or even few hundred mansions, yachts, and personal jets of other very wealthy businessmen and capitalists, pale into insignificance alongside the tens of millions of ordinary homes, automobiles, refrigerators, freezers, washer-dryers, air-conditioners, television sets, and computers of the general population. A major, probably the greater part of the consumption of the leading businessmen and capitalists takes the form of the support of such institutions as universities, hospitals, opera companies, libraries, and the like. When all this is taken into account, it turns out that in the first place there is simply not very much to redistribute the benefit of which the intended beneficiaries of the redistribution do not already have.

It also turns out that attempts to redistribute the wealth of businessmen and capitalists serves almost entirely to reduce the supply of means of production and the demand for labor. In essence, it is a self-destructive policy of eating the seed corn. Summers and Obama are ignorant of such facts. Never having studied the works of Mises, they have no way of knowing them. (For elaboration of these points, see the author’s Capitalism: A Treatise on Economics, pp. 297-303, 622-639.)

It speaks volumes that apparently no one to whom Summers presented his “favorite argument” had the ability to find any moral or practical flaws in it.

Summers should be fired. He’s too shallow and ignorant and his ideas too evil for him to serve in the United States Government in any capacity. Although generally viewed as a prominent professional economist, his actual knowledge of the subject is minimal. This conclusion follows from the fact that the essential subject matter of economics is capitalism. And Summers’ ideas on redistribution reveal that he fails to understand the nature of the most essential feature of capitalism, namely, private ownership of the means of production and the indispensable role it plays in the standard of living of the average person.

His views may qualify him to be an economic advisor to Hugo Chavez of Venezuela or Robert Mugabe of Zimbabwe, but certainly not to be an economic advisor to the President of the United States. Before anyone assumes that position, he should know and understand the ideas of Ludwig von Mises, who is far and away the leading theorist of capitalism, and whose works explain its operation as it is has never before been explained. In the absence of extensive knowledge of Mises, one is, simply put, an economic ignoramus, irrespective of the degrees, awards, and public acclaim one may enjoy.

[1] These are the same kind of reporters who define laissez-faire capitalism in an equally bizarre way. Just as you supposedly can be an egalitarian and a Marxist and still be a centrist, so too you allegedly can have virtual economic fascism and it will still be laissez-faire capitalism. And it will be laissez-faire capitalism which is then blamed for all of the evils of economic fascism. Thus, irrespective of the present-day magnitude of taxation and government control over economic life, irrespective of the massive government intervention in the form of credit expansion and of laws compelling the making of loans to unqualified borrowers, which in fact caused our present financial crisis, laissez-faire, they say, still existed and it is what is responsible for the crisis. They claim that laissez faire existed because financial innovations were able to take place without their first being thoroughly understood by government bureaucrats and only then being allowed to occur. Never mind that the major flaw in the innovations was the mistaken belief, held almost universally, but first and foremost by government bureaucrats and by their allies in the media, that the Federal Reserve had made the existence of depressions impossible. (For elaboration on the attempt to blame the crisis on laissez-faire, see the author’s “The Myth that Laissez Faire Is Responsible for Our Financial Crisis.”)

Copyright © 2008, by George Reisman. George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. His web site is www.capitalism.net and his blog is www.georgereisman.com/blog/. A pdf replica of his book can be downloaded to the reader’s hard drive simply by clicking on the book’s title Capitalism: A Treatise on Economics and then saving the file when it appears on the screen.


Babs November 30, 2008 at 3:52 pm

I thank you for your succinct and intelligent treatment of the redistribution of wealth. I agree with you. I am aware that many who voted for Obama are truly ignorant of so many of the economic realities that we live with in our quasi-free market system. They vote out of an appeal to emotion and gut-level fairness instead of a true understanding of the issues. I think they could be persuaded. I believe Jefferson said that education was the best protection of liberty (obviously paraphrased.) I am hoping they will be educated over the next 4 years of the coming administration. But they will need people like yourself to help them connect the dots. In that regard, I urge you to not engage in emotional appeals (the image of thugs coming to arrest) as it weakens your appeal to those who really need to understand. (In addition, I believe a tax lien would come first. This misinformation could discredit you in the eyes of some.) Your influence will be derived from your reputation for veracity and integrity. I hope this helps. I am a patriot who hopes and prays America can one day be restored to its original glory. It will take many like yourself to make that happen.

twojeanonse November 30, 2008 at 3:53 pm

Thanks for very interesting article.

Neal W. November 30, 2008 at 4:41 pm

But what if the wealth distribution since the 70′s has been caused by going off the gold standard?

P.M.Lawrence November 30, 2008 at 5:34 pm

“One of the implications of his proposal is that an individual who increased his earnings by just one dollar could be liable for an additional $800,000 in taxes“.

No, it doesn’t – Professor Reisman is assuming that the additional levy would fall on that varying group of people who qualify from time to time.

What the proposal is literally specifying is far more workable and far less equitable: that a list of people be made up according to that test, and that they then remain liable for that levy. Nobody would ever qualify for paying by earning just a little more subsequently, because the list wouldn’t change – and people would stay on the list even while they gradually lost their resources from being outcompeted by those who missed the cut. And, of course, those who just qualified when the system started wouldn’t have had advance notice to swing the lead so they could miss the cut.

David C November 30, 2008 at 5:38 pm

Good article, but you forgot to mention that the biggest effect of the income tax is that it ironically leads to even greater disparities of income.

As an example. If Buffet earned 1% profit from his 100bln in assets, that would be 1 billion dollars. Tax that at 90% and he still accumulates capital at the rate of 100 million per year. However, if Joe entrepreneur earns his first 100K and is taxed at the more progressive rate of 80% that would leave him at a mere 20K, barely enough to live by and with no assets at all. So the effect is for the income base of the very most rich to keep going up while everyone else will decline. Gee, no wonder “the rich are getting richer and the poor getting poorer” – we need lower taxes.

Abel November 30, 2008 at 6:22 pm

Interesting. I am rather surprised by an article on Mises.org that mentions income inequality, but doesn’t mention the Fed and the role inflation plays in income inequality.

Stephen Grossman November 30, 2008 at 7:34 pm

I hope that Prof. Reisman or someone else here will comment on Mankiw’s absurd Nov30, NYT OpEd on Keynes. It’s destructively consumptionist, with a few out-of-context mentions of the destructiveness of Fed inflation. Investment is mentioned but not production or producers’ goods. Mankiw’s _Macroeconomics_ discusses the Fed without the theory and history of free banking as context. I’m pleased to be reading Reisman’s _Capitalism_ and Mises’ _Human Action_.

Inquisitor November 30, 2008 at 9:47 pm

Not all articles focus on the Fed. :P

Inquisitor November 30, 2008 at 9:49 pm

BTW the article would be better if some statistics were included to demonstrate the veracity of the claims made, such as the preponderance of heirs investing their money.

Nick Bradley December 1, 2008 at 11:29 am

Does anybody here other than George Reisman truly believe that Summers favors a confiscatory tax on those in the top 1%? I believe Summers was merely making a reductio ad absurdum argument to point out how much income inequality has increased over the past three decades.

And hasn’t income inequality over the past 30 years been the result of government intervention in the first place? Growth in the money supply has been funneled to those at the top, while the rest of society gets stuck with the tap: debt and higher prices.

I do not understand why so many libertarians are opposed to income equality. Is there anything wrong with equality if it occurs through market processes? No. As income inequality increases, citizens are more open to political demagougery that can usher in horrible statist policies.

Furthermore, wouldn’t greater income equality result in the more efficient allocation of wealth and capital? After all, I can more efficiently allocate resources in a $10,000 portfolio than in a $10,000,000 portfolio.

Matt Brown December 1, 2008 at 11:29 am

Summers statement, as quoted in this article, does not propose redistribution of income. He is obviously simply quantifying the existing disparity in incomes in terms most Americans can understand. Any economist, liberal or conservative, would realize that such an action in today´s globalized world be counterproductive.

With respect to the general argument, it would be wise to remember that historically, income has always eventually been redistributed. As Hagel said, the history of the world can be seen as a cycle in which money and power are inevitably concentrated into the hands of fewer and fewer people, at which point there is a revolution. He claimed that no civilization has been able to escape this cycle. Both communism and American style capitalism (which gets its power from a large, consumption-oriented middle class) can be seen as attempts to break out of this theoretical cycle.

One can argue against income redistribution on moral or practical grounds, but it is a historical truth that increasing income inequality leads to grave consequences.

Inquisitor December 1, 2008 at 11:37 am

Indeed. So how about we get rid of the Fed, which causes much of it? As well as regulations hampering the poor. And so on. Instead of adhering to this stupid illusion that government is there to protect these morons (morons because they believe in this nonsense.)

Nickolas December 1, 2008 at 12:42 pm

@Nick Bradley

I’m not personally opposed to income equality if it happens because of a free market.

Having it forced on me at the point of a gun is simple theft – nothing more, nothing less.

@Matt Brown

Hagel was correct – And the cause is always government.

Bruce Koerber December 1, 2008 at 2:41 pm

December 1, 2008

Please Congress, Do Your Job!

Read HR 2755. What a sound, succinct, and clearly stated piece of legislation!

There is no need for a bureaucracy to be formed to surround the member of Congress just to get a summary of its content.

It is promising to think that members of Congress can actually be exposed to an easy to understand legislative proposal that has the quality of being submitted by a statesman, not a politician!

Then imagine the magnitude of the issue addressed by this legislation! It phases out the immoral counterfeiting done by a private banking cartel that historically has corruption-ridden roots and which is intimately entangled with what has become the unConstitutional coup that is destroying our Constitutional Republic.

Will Congress recognize this as one of its greatest opportunities to finally apprehend the usurpers of our Constitutional Republic? Are the economic terrorists running out of time?

Please Congress – do your job!

Bruce Koerber December 1, 2008 at 2:48 pm

December 1, 2008

Please Congress, Do Your Job!

Read HR 2755. What a sound, succinct, and clearly stated piece of legislation!

There is no need for a bureaucracy to be formed to surround the member of Congress just to get a summary of its content.

It is promising to think that members of Congress can actually be exposed to an easy to understand legislative proposal that has the quality of being submitted by a statesman, not a politician!

Then imagine the magnitude of the issue addressed by this legislation! It phases out the immoral counterfeiting done by a private banking cartel that historically has corruption-ridden roots and which is intimately entangled with what has become the unConstitutional coup that is destroying our Constitutional Republic.

Will Congress recognize this as one of its greatest opportunities to finally apprehend the usurpers of our Constitutional Republic? Are the economic terrorists running out of time?

Please Congress – do your job!

Nathan Fellman December 2, 2008 at 4:00 am

Having read the NYTimes article it seems to me that Larry Summers said that the only way to restore income inequality to the rate it was in the 1970s is to, as you put it, steal from the rich to give to the poor. I don’t see him _advocating_ such an act, just saying that that would do the trick.

Michael December 4, 2008 at 5:43 am

It is interesting to hear the dire predictions of the results of a more progressive tax policy, when the US has had those policies in the past, and they proved profitable for all income brackets. Most of Europe has long had similar policies, and it seems to allow luxuries like universal health care and college education without driving the rich to live elsewhere.
The article talks about the possible robbing of the rich, but it fails to mention the actual looting of the middle class that the current policies have engendered for decades, thanks to the disproportionate influence that the rich have had in politics.

The fact that Obama was elected easily in spite of being broadly painted as a socialist and him even saying unapologetically that sharing the wealth benefits everyone, indicates to me that the public was not deceived and they want these redistributionist policies, because they are sick of the alternative.

Response to Michael March 26, 2009 at 12:46 pm


How have the rich been exercising an “disproportionate influence” in politics?

1) In order to win an election the rich require a majority of the votes. The rich therefore would have to win by promising the voting public the same amount of “free” goodies as any other politician. The voters who fall for this “free goodie” agenda seem to be as much to blame.

2) Mr Obama’s fascistic politicies of banking bailout are consistent with the “pro-rich” agenda decried by the left. The head of the Socialist Party of America has denounced Mr. Obama for his kowtowing to fascism.

Finally, the opposition to Mr. Obama is not that he fails to “favor the rich”, but that he is hostile to capitalism. Correctly understood this means that he is an enemy of freedom loving people of every class.


Michael A. Clem March 26, 2009 at 1:01 pm

Gee, Michael, you’ve correctly pointed out the flaw of the Two-Party system: one party offers socialism, and the other party offers fascism. What about those of us who desire neither alternative, but seek true freedom, and the right to keep what you’ve justly earned, instead of being stuck in an income tax bracket?

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