January 10, 2012

Elizabeth Warren’s Sloppy Progressivism

The Senate candidate needs a crash course in wealth creation.

President Barack Obama is not the only high profile candidate for public office who portrays himself as the champion of the middle class. Right now, in Massachusetts, Elizabeth Warren, a longtime Harvard Law School professor, is projecting that same image in her determined run to displace Senator Scott Brown in next November’s election. Warren catapulted to fame in the Obama administration as the intellectual stimulus behind the creation of the Consumer Financial Protection Board, now headed by Richard Cordray after a controversial recess appointment.

 Epstein  
 Illustration by Barbara Kelley

Now that Warren is free of her institutional obligations at the federal level, she has come out swinging on a large number of issues dear to progressive hearts. Her most powerful statement is posted conspicuously on moveon.org. Its call to arms requires a restrained and rational answer.  Here is her manifesto in full:

There is nobody in this country who got rich on his own. Nobody. You built a factory out there—good for you!

But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea—God bless. Keep a big hunk of it.

But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

Her first sentence is meant as a direct assault on the notion of radical individualism. Yes, it is obvious that no person “ever got rich on his own.” But that statement does nothing to undermine sensible forms of laissez-faire individualism. The reason why people do not get rich by themselves is not that they lack self-reliance or ambition. It is because the individuals who succeed understand the key proposition that personal gains result only through cooperation with others. The common business school refrain of win/win deals is not an observation about one person: it is, at its core, about two (or more) people, all of whom win through cooperative arrangements.

Warren wants to reduce the role of the entrepreneur in society.

So when she says that “you” built a factory out there, it is the collective, not the singular, “you” that is invoked. You, the individual, built it because you were able—through a variety of voluntary transactions, all of which took advantage of the division of labor—to locate, design, finance, construct, and market that project. “You” used a variety of cooperative mechanisms: corporations, partnerships, and joint ventures; the hiring of salaried employees; and the use of personal savings, venture capital, and debt financing. To ignore all these joint efforts is to miss the entire point of how anyone succeeds. It is to miss, as well, the key point that the gains from trade are not confined to just those persons involved in building “your” factory. Rather these gains spread out to family members, friends, and everyone else whose opportunities for trade have expanded because of the new wealth created.

Looked at in this way, laissez-faire capitalism is acquitted of the charge of radical individualism driven by an insatiable greed. Rather, laissez-faire comes to embody the notions of freedom of contract and association that allow people whose assets are protected against external aggression to find each other and to share the wealth created by the gains from trade.

It would, of course, be a giant error to assume that all these voluntary transactions are self-enforcing without back up from a strong and coherent government.  At their core, a sound laissez-faire program necessarily depends for its implementation on the creation of effective and focused government. Warren may be no deep political theorist, but she is certainly alert to the needs of sensible governments to provide collective goods to society. Hence, her next sally is intended to reduce the role of the individual entrepreneur in creating those goods. “You moved your goods to market on the roads the rest of us paid for.”

Her “you” is decidedly in the singular. Her “you” stands in opposition to all the other good people in society on whom “you” choose to free ride.  It is there that she makes yet another fatal intellectual blunder. Last I looked, there was more than one car or truck on the interstate highway. The “you” that used the road was decidedly plural. Is it really possible to think that the “us” who have paid for the roads are only those people who did not move their goods to market on the public highway? Or did not use and consume the goods that were so moved?

If so, then we have a truly absurd situation in which millions use roads that no one really pays for. The key mistake in Warren’s rhetorical excess lies in her impolitic (but highly political) choice of pronouns. Just think of the loss of rhetorical pop that takes place by toning down the sentence so that it reads. “We all moved our goods along highways that we have all paid for.” Her misuse of the you/us dichotomy receives its deserved inclusion in the garbage dump of bad ideas. In its place, we are left with the notion that common resources are paid for out of public funds. How novel!

Putting the point in that correct fashion not only defuses the politics, it also sets up a series of real questions on just how those public roads should be financed and operated. On financing, just what fraction of the costs of building and running the highway system should be borne by each person who uses it, or derives benefit from its use?

Laissez-faire capitalism requires an effective and focused government.

The first move in this inquiry is to knock out any form of taxation on the parties who derive indirect benefits from the use of the roads. It is not that they should get something for nothing. It is that any sensible allocation of the costs of public roads and infrastructure on its users will be passed through by the price mechanism to their ultimate beneficiaries. A streamlined system thus saves enormous administrative costs without creating any serious resource misallocations.

The allocation of costs among users, however, is a tricky matter. The initial constraint is that revenues from all sources have to be sufficient to cover the costs of construction, maintenance, and operation of the system. We do not want the state to be able to use its monopoly power over the roads to extract huge sums from system users. Private common carriers have long been limited to fair, reasonable, and nondiscriminatory rates. The government, when it has that monopoly power, should be subject to that same constraint.

That said, just how should those costs of system operation be allocated? In general, it is better to avoid blanket grants from the public treasury. Those revenues will cover the costs, but they will do nothing to insure that highway users economize their use of public resources. User fees that are proportionate to the costs imposed on the system are a better way to attack this issue. Direct measurement of these costs is often difficult, but whenever possible, it should be done in ways that take into account independently the costs of congestion, pollution, and road damage. 

When those direct measures are not available, it will be necessary to resort to proxies. But all proxies are not equally good. Using a gas tax to fund highways may be better than using general revenues, but it turns out that weight does more damage to roads than miles driven, so axle plus mileage fees for heavy trucks, which cause the most damage, are probably needed to make the correct cost allocation. The details get only more convoluted when there is a need to deal with interstate as well as local traffic. In the midst of these serious system-design challenges, however, the one clear nonstarter is Warren’s you/us dichotomy. The irony is really palpable. A progressive candidate who should want to think hard about the proper financing of public goods has, in the end, nothing intelligent to say about the matter.

Her rhetoric is no less inflammatory when she intones, “You hired workers the rest of us paid to educate.” Good grief! Her statement compresses so many errors into so few words that it is hard to know where to begin. Unbeknownst to Warren, most businesses engage extensively in the education of their employees, whether through on-the-job instruction or the financing of education through third parties. The one thing that can be said about these programs is that, in general, they are far more efficient than the endless public jobs programs, financed by taxpayers, which teach people skills they don’t need for jobs that they can’t acquire or retain. In addition, individuals and their families finance much of their own education, especially those who go onto higher education.

Time after time, Warren embraces coercion over cooperation.

For public education, the countless employers in the labor market have paid at least their fair share in property taxes and income taxes to support the education of others, including the badly-run public loan subsidy programs with high rates of default. Warren then brands as freeloaders those productive individuals who, by orders of magnitude, pay more than their “fair” share of taxes, as if the anonymous public has mysteriously footed the entire bill.

She does no better when discussing public safety: “You were safe in your factory because of police forces and fire forces that the rest of us paid for.” Once again the same you/us dichotomy obscures a far more complex reality. The first point is that today in the United States, it is just wrong to say that all police and fire services are paid for out of public dollars. It took me precisely 30 seconds worth of online research to confirm what is common knowledge. “The private security industry already employs more guards, patrol personnel, and detectives than the federal, state, and local governments combined, and the disparity is growing.” These private individuals, many of whom are “the rich,” have generated huge benefits not only for each other, but for the rest of the population. Their efforts reduce overall levels of crime and the tax burden needed to fund public security forces, all while creating thousands of jobs. This is not to say that these private police forces are always beyond reproach or could function in the absence of any public police officers.

Much the same is true in the case of protecting society from fires, which also needs a public force, even as ordinary people privately prevent fires each time they buy a fire extinguisher or fire proof their homes. These facts remind us that it takes a modicum of thought to figure out what the correct relationship is between the public and private enforcement of our health and safety laws. For that task, Warren’s unwise words supply no help at all.

Finally, her kicker about intergenerational equity is every bit as off base. “But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.” In addition to free-riding off of the present generation, Warren thinks that you, the factory owner, are taking resources out of the mouths of the next generation. But once again, she shows no knowledge about the fine art of wealth creation. You, the factory owner, have created a durable asset whose expected life could easily exceed your own. Its wealth gets passed on to the next generation, whether or not its owner has to pay an estate tax. Indeed, the imposition of heavy taxation at the time of death can easily disrupt the orderly transmission of wealth by requiring asset sales or loans that shrink the asset pool available for running the enterprise.

In addition, Warren seems largely oblivious to the fact that it does not take government coercion to have the fortunate individuals from one generation help out the less fortunate ones in the next. A charitable tax deduction for those who contribute to scholarship at all levels will outperform direct government distribution of funds any day. Even without it, nothing is more common than to see the great universities, research centers, and foundations funded by individuals who have long figured out that even a billionaire can only consume a tiny fraction of the wealth that he or she creates. So Warren again embraces coercion over cooperation; in her progressive universe the decision to “pay forward” for the next generation refers to government compulsion, not private expenditure.

Nothing that she writes on moveon.org makes sense. What she omits from her discussion is every bit as instructive. Warren waxes eloquently about how “you” exploit us. But she never once talks about how we exploit you. That factory did not just get built. Building it required its owner to go through an elaborate set of permit approvals and regulatory obstacles. In places like Massachusetts, the taxes on capital and initiative have made it one of the progressive sink holes of the northeast precisely because, when it comes to innovation, it is possible to play the time-honored NIMBY game—NOT IN MY BACK YARD.

At this point, the politics of you/us becomes too real, and we find that the factory owners are lumped with the dangerous one percent whose influence Warren is all too eager to curb. The former Harvard Law professor never bothers to ponder the dangers that faction and popular democracy pose to the creation of both wealth and jobs. She needs to go back to Harvard to retool her wasting analytical skills—and soon.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


Letters to the editor

Where Would We Be Without Pesky Capitalists?

Thanks for an interesting read.

Ms. Warren's logic seems to imply that an educated workforce, ample police, fire, safety, etc., all existed in communities before any factories were built. They were just waiting around for the lazy capitalists to show up and build a plant or two.

It's fairer to say that in many communities at least, those kinds of services and resources get built up only if and when large, stable employers move in and, over time, upgrade the infrastructure, willfully or not.

I wonder, for example, what an aerial picture of Detroit would have looked like in the days before the car companies arrived? How hard would you have had to look to find all those power plants, roads, bridges, cops, firemen, etc, just sitting around...waiting for those pesky capitalists to come up with the idea of mass producing the automobile.

---Michael Corrado

An Arsenal of Answers

Professor Epstein nails it again. This could not be more timely, as voters consider both their choices in the race between Elizabeth Warren and Scott Brown, and the lumbering juggernaut that she helped build to "protect" them and all consumers from whatever its operators consider to be "unfair" market action.

The best part of Professor Epstein's analysis is its versatile utility. It is a polite demolition of bad thinking and worse argument. It is also a gentle lesson in economic and political theory that anyone claiming literacy can and should absorb without shame or struggle.

And, most importantly, it is a set of points easily remembered and carried into the fray, as we all push on with our busy lives. They are sharp, and thus satisfyingly effective. But they are also strong and based on sound principle, which makes them worthy. For those many of us who read Warren's "argument" and sensed it was wrong but lacked the time and tools to pick it apart, leaving us only a sense of frustration at being outflanked by a low and cunning maneuver, Epstein's essay is an arsenal of answers.

---Owen Hughes


Letters to the editor may be sent to definingideas@stanford.edu. Editors reserve the right to reject or publish (and edit) letters.