The American Dream

Whether Americans have cause to give up on the historical American dream of an ever better future is the subject of the cover story by Jon Meacham in the June 21, 2012 issue of Time magazine.

Mr. Meacham ponders the well-known fact that average incomes, and the standard of living of most Americans have not been rising since the 1960s, but actually have been falling in “real” (inflation-adjusted) terms. Mr. Meacham does not provide any explanations for this disappointing trend, nor does he propose solutions that would put America back on track towards a renewed fulfillment of the American dream. ¹

There are good explanations for the slowing and then the reversal of the growth of prosperity in America, explanations  that are “good” in the sense that they show why this has happened. In brief, the federal and local political state in America, in all its   manifestations, has failed to protect innovators and innovation; has mounted incessant attacks on production, property, savings and investment; in the name of social stability and security has promoted instability and insecurity; has launched violent attacks on its own citizens through unnecessary and repeated warring as well as criminalization of behavior which ought not to have been treated as criminal; has stifled curiosity and promoted indoctrination and conformity in schooling of the young; has created incentives for some people to be non-productive and disincentives for others to be productive.

The foregoing list of examples could be multiplied and expanded considerably without making a complete catalog of  the manifold ways the state has impeded progress in America. Further on in this essay there will be a more specific but still necessarily incomplete  explanation of the negative effect of the state on prosperity in America. The subsequent explanation will be an introduction to a complete proof rather than a complete proof in and of itself, because to offer complete and satisfying proof is the task of the entire book of which this blog post is but a brief review and supplement.

According to the cover story in the September 17, 2012 issue of Time magazine, the American dream is being enhanced and protected by subsidies from the federal state, i.e., the United States of America. Author Michael Grunwald observes that in everyday life all Americans, including the wealthiest, are benefiting from and taking advantage of federal  subsidies that make life better. In Mr. Grunwald’s view federal subsidies are not limited to money paid out by the state to individuals and businesses, but also include taxes not collected by the U.S. on account of lower tax rates on some kinds of investment income, and exemptions and deductions that reduce federal income tax liability. ²

Mr. Grunwald points out that even extremely wealthy citizens benefit from provisions in the tax laws that provide for lower tax rates on investment income than on personal income from services. Mega-billionaire Warren Buffett made the same point in a New York Times Op-Ed essay that stated, and deplored the fact that his marginal tax rate (the tax on the highest level of taxable income) was lower than that of secretaries in his office. ³

Mr. Grunwald lists over twenty federal subsidies that benefit his family, stating, inter alia: “The sun is shining on Miami Beach, and I wake up in subsidized housing. I throw on a T-shirt made of subsidized cotton, brush my teeth with subsidized water and eat cereal made of subsidized grain. Soon the chaos begins, two hours of pillow forts, dance parties and other craziness with two hyper kids and two hyper Boston terriers, until our subsidized nanny arrives to watch our 2-year-old. My wife Cristina then drives to her subsidized job while listening to the subsidized news on public radio. I bike our 4-year-old to school on public roads, play tennis on a public court . . .” etc.

Mr. Grunwald opines that some subsidies have gone too far and are wasteful or counter-productive, but generally his view of federal subsidies is favorable. It is hard for the writer of this blog post to imagine a more mistaken and self-deluded idea than Mr. Grunwald’s belief that state intervention in economic life is beneficial. The concluding analysis in this blog post examines why Mr. Grunwald is totally mistaken about the effect of state intervention in our lives and why Mr. Meacham is bewildered about the waning of prosperity in America.

The American dream has been transformed into a nightmare for long-time residents of California’s San Joaquin valley, according to an essay published in 2010 by history professor Victor Davis Hanson. He contends that federal subsidies have been a major factor in causing economic depression, blight and pollution in the rural central valley of California where Professor Hanson was born and raised, and still operates a family farm, when not otherwise occupied by his academic activities. See “Two Californias: Abandoned farms, Third World living conditions, pervasive public assistance—welcome to the once-thriving Central Valley,” by Victor Davis Hanson, National Review Online, December 15, 2010, http://www.nationalreview.com/articles/255320/two-californias-victor-davis-hanson ⁴

Professor Hanson’s essay begins: “The last three weeks I have traveled about, taking the pulse of the more forgotten areas of central California. I wanted to witness, even if superficially, what is happening to a state that has the highest sales and income taxes, the most lavish entitlements, the near-worst public schools (based on federal test scores), and the largest number of illegal aliens in the nation, along with an overregulated private sector, a stagnant and shrinking manufacturing base, and an elite environmental ethos that restricts commerce and productivity without curbing consumption.”

This is a view of America even more disturbing than Jon Meacham’s essay on the lost American dream. Hanson continues:

“My own farmhouse is now in an area of abject poverty and almost no ethnic diversity; the closest elementary school (my alma mater, two miles away) is 94 percent Hispanic and 1 percent white, and well below federal testing norms in math and English.

“Here are some general observations about what I saw (other than that the rural roads of California are fast turning into rubble, poorly maintained and reverting to what I remember seeing long ago in the rural South). First, remember that these areas are the ground zero, so to speak, of 20 years of illegal immigration. There has been a general depression in farming — to such an extent that the 20- to-100-acre tree and vine farmer, the erstwhile backbone of the old rural California, for all practical purposes has ceased to exist. . .

“On the western side of the Central Valley, the effects of arbitrary cutoffs in federal irrigation water have idled tens of thousands of acres of prime agricultural land, leaving thousands unemployed. Manufacturing plants in the towns in these areas — which used to make harvesters, hydraulic lifts, trailers, food-processing equipment — have largely shut down; their production has been shipped off overseas or south of the border. ⁵

“Agriculture itself — from almonds to raisins — has increasingly become corporatized and mechanized, cutting by half the number of farm workers needed. So unemployment runs somewhere between 15 and 20 percent. . .

“Many of the rural trailer-house compounds I saw appear to the naked eye no different from what I have seen in the Third World. There is a Caribbean look to the junked cars, electric wires crisscrossing between various outbuildings, plastic tarps substituting for replacement shingles, lean-tos cobbled together as auxiliary housing, pit bulls unleashed, and geese, goats, and chickens roaming around the yards. The public hears about all sorts of tough California regulations that stymie business — rigid zoning laws, strict building codes, constant inspections — but apparently none of that applies out here. . .

“Yesterday . . . I rode my bike by a stopped van just as the occupants tossed seven plastic bags of raw refuse onto the side of the road. . .

“We hear about the tough small-business regulations that have driven residents out of the state, at the rate of 2,000 to 3,000 a week. But from my unscientific observations these past weeks, it seems rather easy to open a small business in California without any oversight at all, or at least what I might call a ‘counter business.’ I counted eleven mobile hot-kitchen trucks that simply park by the side of the road, spread about some plastic chairs, pull down a tarp canopy, and, presto, become mini-restaurants. There are no “facilities” such as toilets or washrooms. But I do frequently see lard trails on the isolated roads I bike on, where trucks apparently have simply opened their draining tanks and sped on, leaving a slick of cooking fats and oils. . .

“Many of the rented-out rural shacks and stationary Winnebagos are on former small farms—their vineyards overgrown with weeds, or torn out with the ground lying fallow. . . I don’t think I can remember another time when so many acres in the eastern part of the valley have gone out of production. . .

“Do diversity concerns, as in lack of diversity, work both ways? Over a hundred-mile stretch, when I stopped in San Joaquin for a bottled water, or drove through Orange Cove, or got gas in Parlier, or went to a corner market in southwestern Selma, my home town, I was the only non-Hispanic; there were no Asians, no blacks, no other whites. . .

“[T]here are now countless inland communities that have become near-apartheid societies, where Spanish is the first language, the schools are not at all diverse, and the federal and state governments are either the main employers or at least the chief sources of income — whether through emergency rooms, rural health clinics, public schools, or social-service offices. An observer from Mars might conclude that our elites and masses have given up on the ideal of integration and assimilation, perhaps in the wake of the arrival of 11 to 15 million illegal aliens. . .

“At crossroads, peddlers in a counter-California economy sell almost anything. Here is what I noticed at an intersection on the west side last week: shovels, rakes, hoes, gas pumps, lawnmowers, edgers, blowers, jackets, gloves, and caps. The merchandise was all new. I doubt whether in high-tax California sales taxes or income taxes were paid on any of these stop-and-go transactions. . .

“In two supermarkets 50 miles apart, I was the only one in line who did not pay with a social-service plastic card (gone are the days when “food stamps” were embarrassing bulky coupons). But I did not see any relationship between the use of the card and poverty as we once knew it: The electrical appurtenances owned by the user and the car into which the groceries were loaded were indistinguishable from those of the upper middle class.

“By that I mean that most consumers drove late-model Camrys, Accords, or Tauruses, had iPhones, Bluetooths, or BlackBerries, and bought everything in the store with public-assistance credit. This seemed a world apart from the trailers I had just ridden by the day before. .  . [T]here are vast numbers of people who apparently are not working, are on public food assistance, and enjoy the technological veneer of the middle class. California has a consumer market surely, but often no apparent source of income. . .

“How odd that we overregulate those who are citizens and have capital to the point of banishing them from the state, but do not regulate those who are aliens and without capital to the point of encouraging millions more to follow in their footsteps. How odd — to paraphrase what Critias once said of ancient Sparta — that California is at once both the nation’s most unfree and most free state, the most repressed and the wildest. Hundreds of thousands sense all that and vote accordingly with their feet, both into and out of California — and the result is a sort of social, cultural, economic, and political time-bomb, whose ticks are getting louder.”

Professor Hanson’s essay is more than a report of what he saw. Professor Hanson grew up in a very different central valley of California than the one he describes seeing on his three-week tour of the valley in 2010. He remembers the central valley of  his youth and young manhood when small-scale farming was an attractive way of life for farm families, and his hometown and environs were decent places to live.

The way he marshals the facts about his observations makes of those observations an argument. Professor Hanson is saying that for his home area in California’s central valley, the state has made things worse rather than better; that the state has caused this deterioration in life both by what it does and what it does not do: by its welfare payments and subsidies that attract poor people from Mexico and by its failure to enforce its own immigration laws, health laws and environmental protection laws.

Everybody has a worldview or a philosophy of life whether they realize it or not. We all view the world through the prism of our personal experiences and what we have learned from family, school, books, television, and newspapers.

However, as we consider the information coming to our attention we tend to look for that information and those opinions of others that bolster and reinforce our existing biases and perceptions. Thus, people can be diligent about keeping up with “the news” and yet have widely differing opinions about the significance of the news.

The views of Professor Hanson in the quotations above from his essay are consistent with some principal ideas in the book that is the raison d’être of this website, Capitalism: The Liberal Revolution (CTLR). For example, in Chapter 6 entitled “Abundance and its Sources–Poverty and its Causes” it is posited that the source of abundance is knowledge and innovation, peace, freedom from political control, savings and the accumulation of capital, property, and the profit motive, inter alia. That chapter also argues that political controls over human action are the essence of many things that cause poverty, e.g. war, taxation, state interference with production and employment, etc.

However, someone who views the world through the filter of politics may well differ with Professor Hanson, arguing that the people of California’s central valley need not less political action but more political action.

Who is right, those who eschew politics and the state, or those who seek political solutions to everything? Near the outset CTLR has a chapter entitled, “How do you know you are right? An Absolute Standard of Rightness.” ⁶ This chapter posits that the scientific method is the way to knowing whether you are right.

But there is another factor to consider—the idea that one cannot apply the scientific method, and the laws of nature to solve problems of human interaction. This idea is based on the fact that human beings can change their mind, unlike the inanimate phenomena that are the subject of the physical sciences, and unlike the forms of life studied in much of biology, forms of life that lack the ability to make conscious choices. If the factor of human choice makes inappropriate the scientific method as a means to improve the human condition, then it would be futile to expect from the scientific method a solution to any of the myriad human social problems evident in contemporary America and throughout the world.  CTLR deals with this idea in chapter 3, entitled “A New Science: Volition.”

David Deutsch, a physicist and philosopher, has published a brilliant book, The Beginning of Infinity (“TBOI”) that illustrates convincingly why the scientific method is, as Galambos posited, the most successful human invention for increasing understanding, rectifying errors, and solving problems. ⁷

Two of the central premises of TBOI are that (1) problems are inevitable but they are soluble; and (2) the quest for better explanations is the essence of the age of enlightenment and the means to discover what is real and true and what is not.

Seeking better explanations was the spirit of the enlightenment, that era of rapidly expanding human knowledge that has been developing since the sixteenth century and is continuing and accelerating. The enlightenment and the human science it fosters imply as the criterion for reality that we should conclude something is real, or is right, only if it figures in our best explanation. Deutsch cites as the epitome of the attitude of science the statement of the celebrated physicist Richard Feynman that “science is what we have learned about how to keep from fooling ourselves.” ⁸

TBOI expresses elegantly what Andrew Galambos said about the human condition, that  we can use our observations to determine what works and what does not work in the human pursuit of happiness.

Through the filter of the body of knowledge set forth in CTLR, we can see why Jon Meacham appears bewildered by, and had no explanation for the faltering of the advance in prosperity that underlay the American dream for the first 137 years of America’s existence (1776-1914). Mr.  Meacham expressed no opinion about what caused America to prosper so mightily for over a century, or what caused that growth of prosperity to cease.

The American Dream arose out of the wealth produced by an America very different from the America of today, an America with relatively minimal state interference with the freedom of individuals to enjoy the fruits of their labor and ingenuity. Except for enforcing slavery and waging the Civil War,  the bloodiest war in American military history, the state pretty much left Americans to their own devices from independence in 1781 until 1914. ⁹

The reader of the following description of the negative effect of the state on American prosperity will see herein only conclusions and not explanations. For explanations the reader is referred in general to the book on the website of which this blog is a part, namely Capitalism: The Liberal Revolution (CTLR) and specifically the chapters entitled “Political Democracy in America” and a soon to be published chapter entitled “Monopolies: Coercive and Non-Coercive.”

The major state assaults on American prosperity began with the Civil War, which wreaked havoc and destruction on the southern states and caused the deaths of approximately one in seven military age males counting fatalities on both sides of the war. In addition the war maimed for life many of the combatants and so decimated the young men of America as to create a generation of widows who were unable to find another husband due to the shortage of marriageable men.

The Sherman Antitrust Act of 1890 was intended to, and was used to attack the most innovative, entrepreneurial, productive and successful of the large companies that built up American industry–because their success aroused the envy of competitors who had failed to match the quality of goods and the cheapness of prices of products of the large companies.

The motivation of some of the proponents of the federal income tax law of 1913 was expressed in Congressional debate on the proposed income tax law when Rep. William H. Murray of Oklahoma said “the purpose of this tax is nothing more than to levy a tribute on excess wealth . . .” ¹⁰

Within four years after enactment of the income tax law the maximum rate rose from 7% to 77% and was never again lower than 25%. Taxes on income siphon off the earnings of individuals and businesses that could be reinvested as capital to fuel the future growth of investment, production and consumption.

The Federal Reserve central bank was created also in 1913. While the Federal Reserve was intended to stabilize the American economy by protecting it from booms and busts, it has done just the opposite by creating conditions which helped to cause the Great Depression of the 1930s, the high inflation of the 1970s and the financial crisis that erupted in 2008.

High tariffs (taxes on imports) were enacted in 1890, 1922, and 1930 for the explicit purpose of protecting domestic producers from foreign competition. The high tariffs did not benefit the American public, but rather raised prices to the public by protecting less efficient American business from competition with foreign producers of higher quality and lower cost goods.

With the Great Depression  of the 1930s came a renewed assault on businesses and high taxes that impaired the ability of members of the public to save and invest to provide for their future, and to provide investment capital for the expansion of productive business activity. Federal mortgage finance subsidy legislation of the 1930s was the model for, and culminated in massive amounts of unsound mortgage lending in the real estate bubble years of the mid-2000s.

All the foregoing laws are impediments to the continued growth of productivity and wealth that fueled the engine of economic progress that had engendered the American Dream. This brief listing is but a summary of events and not a demonstration of the destructive impact of the state on the ability of individuals and businesses to prosper through free enterprise. As noted herein, for proof of the assertions above the reader is referred to the full text of CTLR, and especially the chapters entitled “Political Democracy in  America,” and “Monopolies: Coercive and Non-Coercive.” ¹¹

Through the filter of the ideas of free market, laissez-faire capitalism we can see why Michael Grunwald was wrong in arguing that Americans benefit from state subsidies and the taxes that pay for them. In his short and excellent book, Economics in One Lesson (2nd ed. 1979), economic historian and journalist Henry Hazlitt demolishes the argument for subsidies as follows:

“. . . [I]n the case of a subsidy [to X industry] it is obvious that the taxpayers must lose precisely as much as the X industry gains [and] . . . other industries [or companies] must lose what the X industry gains. They may pay part of the taxes that are used to support the X industry. And customers, because they are taxed to support the X industry, will have that much less with which to buy other things. . . The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.” ¹²

Through the understanding of the effects of state intervention in human affairs as set forth in CTLR (and in many other sources) we can see that Victor Davis Hanson has identified correctly some failings of the state that have devastated the part of California where he grew up and still maintains a family farm.

Better explanations start with observations to understand what is going on. By now there is ample, observable evidence that political action by the state is not making life better for Americans. The evidence is there for all to see in both rural and urban settings all over America. Witness conditions in the inner city portion of most American cities–the high rate of unemployment (especially among the young), a multitude of single parents, unsupervised adolescents, juvenile gang activity, and unclean living conditions. These conditions have developed since enactment of a variety of environmental protection laws beginning in the 1960s and despite the expenditure of many trillions of dollars by the federal state under the banner of a War on Poverty declared by President Lyndon B. Johnson in 1964. ¹³

Furthermore, illegal, highly profitable, and socially corrosive trafficking in narcotic drugs, especially in America’s poverty-stricken inner cities, has grown rather than decreased over the nearly century-old federal “War on Drugs,” initiated in 1914. It apparent for all to see, except those with a vested economic interest in enforcement of the anti-drug laws, that the state’s war on drugs is a failure, not only in the U.S., but globally. ¹⁴

The state’s war on drugs has diminished the wealth and productivity of America by diverting enormous sums of money from productive activity into individuals’ spending large amounts on narcotics that are expensive because they are illegal, and into the cost of law enforcement by police officers, prosecutors, the courts, and the prison system. This is a subject to be taken up in a comprehensive analysis in a forthcoming chapter of CTLR on justice–and the injustice inherent in the political laws that make personal vices into illegal acts.

The path to a better America and a better world does not lie through politics and political action. The way to a better future is through human cooperation on a voluntary basis. Look around. Everything that is great about America—that inspired the American dream–is the product of human science and ingenuity, individual enterprise and voluntary dealings and cooperation among people.

In his V-50 lectures Andrew Galambos challenged his hearers to make a list of their ten favorite things and the ten things they liked the least. He said chances were good that none of the favorite things would be due to politics, and all the disfavored things would be due to politics. For those who find it incredible to attribute such blame to politics, think of what Sherlock Holmes said to his friend Dr. Watson in a Sherlock Holmes detective story: “My Dear Watson, you see, but you do not observe.” ¹⁵ There is a difference between seeing and observation. Sherlock Holmes could learn a great deal by watching a man walking down the street that his friend Dr. Watson could not imagine until Holmes pointed it out. Professor Hanson is an observer because he can explain why his hometown and much of California’s central valley have fallen on hard times.