Thursday, September 22, 2011

Elizabeth Warren, Same Rhetoric

So, Elizabeth Warren is out there running for the Senate and has people swooning over her rhetorical prowess. This quote is floating around the Interwebs in recent days:

"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... Now look. You built a factory and it turned into something terrific or a great idea -- ...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."

Let's deconstruct this a little. Warren is implying a few things:

  1. Entrepreneurs don't pay taxes that build schools, roads, pay for police, fire fighters or the military.
  2. There is unequal access to roads, police, fire fighters or military protection.
  3. The students of public schools don't accrue the vast majority of economic benefits of their education through improved economic lives.
  4. The consumer of the products don't accrue the vast majority of economic benefit of the entrepreneur's production.
  5. There are no failed enterprises.

Using Warren's implied assumptions, it then follows that the product of the entrepreneur's efforts are unearned and thus belong to "society" instead of the creator. Of course, she does not say exactly that, providing little guidance about what "a Big Hunk" means. We rarely get an answer about what proportion of the economic benefit should be retained by the creator and what fraction "belongs" to "society". The underlying tone is the entrepreneur took something, so now must pay it back.

Regardless, all these assumptions are flawed. Businesses and entrepreneurs pay taxes that support the building of roads, police, fire fighters and the military. There is equal access to the highways; anyone can put goods on the roads, subject to government restrictions of course. Students who go through schools are the ones who gain the most. The diligent student's income far exceeds the "investment".

As far as where benefits of innovation accrue, economist William Nordhaus estimates:

For the entire postwar period and for the nonfarm business sector, Nordhaus estimates that innovators are able to capture about 2.2 percent of the total surplus from innovation.

I wonder if Warren considers this to be sufficient distribution of benefits (97.8% to society and 2.2% to the innovator). In the case of failed enterprises and capital losses, does the implied expectations that the benefits will be "paid forward" also imply that the losses will be absorbed by "society"?

In the end, Warren is merely peddling the same progressive rhetoric: "You Owe Us" with a healthy dose of "you have it, I want it, hand it over."

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