When All Is Said And Done

The healthcare law is the first step in what will probably become a sustained movement to shift the balance of economic power in the US from producers to consumers. It’s going to be accomplished by steadily increasing the tax burden on high earners and expanding benefits to those who earn relatively less.

We’ve seen this before. It was more or less the effect of the labor movement in the middle of the last century. In the decades after WW2, we dominated global economic output (about one-half the total, compared to about one-third today), and trade was a much smaller part of our economy than it is now. In this relatively closed system, it was possible for unions to systematically increase the cost of labor. Labor historians, ignoring the effects of technology-driven productivity improvements, will tell you that this shift in wealth is what created the great American middle class.

The Reagan Revolution shifted the balance back toward laissez-faire and a more market-driven distribution of income, which has its own distortions. The Obama Revolution, and I’m not hesitant to call it that unless there’s a sustained backlash that goes well beyond the readership of this site, is a swing back in the other direction.

Since we don’t have strong private-sector labor unions anymore, the shift will come by exempting as many people as possible at the lower end of the income distribution from federal taxes, while expanding the benefits provided to them. Health care is just the beginning.

We’re going to get a more equal society out of this, and there’s something to be said for that. But it’s not yet known whether we’ll get a more prosperous one.

I’m basically ok with penalizing high incomes, especially since resisting this in the current political environment seems pointless. But I’m not ok with penalizing the returns to capital. Capital flows toward the highest risk-adjusted rate of return, just as water flows downhill. If we penalize capital, then the effect of the Obama Revolution will not be to spread the wealth, but rather to spread the poverty.

Unlike the heyday of the labor movement, we no longer live in an economically closed system. We’ve already seen that when manufacturing labor is overpriced, we lose jobs to other countries. If high-end labor now becomes overpriced due to higher taxes, then it’ll be time to consider doing our marketing, engineering, financial analysis, and even our doctoring and lawyering in India and Brazil. The technology is almost ready to enable a move like this.