Fear and Class Warfare

Fear and Class Warfare[1] 

by Christopher Arend[2]

 Class warfare is perhaps the most insidious tactic in the Democratic playbook because it combines an appeal to two basic emotions, fear and envy.  Class warfare has virtually universal appeal because everyone can relate to money.  Finally, class warfare involves economics, a field in which even experts cannot agree on even basic concepts.[3]  Class warfare is manna from heaven for propagandists because class warfare thrives on strong emotions about a subject that affects our daily lives where most voters, however, are ignorant.

“Money makes the world go ’round”.  Money might not be the key to happiness, but personal well-being depends to a great extent on our economic situation, which is why the economy is usually the most important issue in politics (“It’s the economy, stupid!”).  We feel the effects of fluctuations in the economy immediately and personally.  It is also basic human natural to look around and see how others are doing.  These perfectly normal concerns about the personal financial situation and whether we are “keeping up with the Joneses” are fertile ground for politicians to exploit emotions of fear and especially envy.

The specific topics in any election year may vary, but the Democrats cast virtually every economic issue as yet another battle in eternal class warfare.  Obamacare was sold as protection of the poor and middle class against money grubbing health insurance companies and “Big Pharma”.  The Democrats’ battle cry when promoting tax increases is that the rich must “pay their fair share”.  This year’s focus is the demand for an increase in the minimum wage under the banner, “Time to give America a raise!”[4]  Now who could possibly be against giving more money to the entire country?  Democratic economic policies and the accompanying propaganda appeal to collectivism and generally fail to recognize basic economic principles.


The “Invisible Hand”, Adam Smith Revisited

1776 was an exceptional year in the history of humanity.  Our country was born as the first nation to recognize the individual’s “unalienable rights”, and Adam Smith published his tome “The Wealth of Nations” which identified the “invisible hand” of supply and demand.[5]  A free market in which individuals make their own decisions about what to produce and what to buy maximizes “economic efficiency”, i.e. a “state in which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency.”[6]

The concept of efficiency has a major subjective element because one person’s view of how to “efficiently” use the own personal resources (= work effort and money) often differs greatly from another person’s idea about what is best for them.  When each member in society is making what they believe to be the most efficient use of their own resources, the aggregate effect per definitionem is that society as a whole is then making the most efficient use of its resources.  Economic efficiency in society as a whole is predicated on individual liberty for each person to use their personal resources as they wish.

Maximum economic efficiency is a theoretical state that can be approached but never achieved,[7] and history is full of examples that show how limiting personal economic freedom can drive an entire society into poverty.  The Soviet Union and the entire east block collapsed economically.  Near the end of East Germany, the only part of the economy that really functioned was the underground economy.  North Korea and Cuba are economic basket cases.  Corruption which forces individuals to give money to crooked officials has long been recognized as a main cause of poverty.[8]

The correlation between individual liberty and economic efficiency does not mean that economic efficiency requires anarchy.  Individual liberty finds its limits in the rights of others: “My right to swing my fist ends where your nose begins.”[9]  The rule of law and a functioning legal system are essential to a good economy.[10]  The players in an economy need rules that define where the other guy’s “nose begins”.  In a complex, technological society in an interconnected world, laws are necessarily intricate.  However, the law must always be focused on maximizing individual liberty, or the economy as a whole will necessarily suffer.  It is no accident that that the wealthiest countries in the world, including the United States of America, are also generally those countries with high levels of individual liberty and functioning legal systems.[11]

Democratic Party economic policies focus on using the heavy hand of government to preempt individuals’ economic decisions.  The effects are necessarily harmful to the economy as a whole.


Minimum Wage

Democrats throughout the country are again pushing for increases in the minimum wage.  Seattle’s city council voted in June 2014 to increase the minimum wage to $15/hour.[12]  San Francisco will vote on a minimum wage increase to $15/hour this coming November.[13]  The obvious consequence of a great disparity in minimum wage between a city and surrounding communities is that job opportunities in the city will be lost because businesses which employ low wage workers then have to raise their prices in order to recover costs, and customers, businesses and jobs will migrate outside the city limits.[14]  The typical Democratic Party approach to alleviate that problem would be to raise the general minimum wage.

The basic concept of a minimum wage that forces employers to pay an amount in excess of what they would otherwise have to pay is contrary to the fundamental principles of a free market economy in which supply and demand based on employers and employees freely negotiating their wages determines wages.  Of course, if a minimum wage law sets the minimum wage below or at the point determined by supply and demand, the law has no effect on jobs or wages.  If the law sets a minimum wage above that point and businesses cannot pass on the costs of the minimum wage increase and the profit margin cannot cover the increase, as is often the case, for example, in the fast food industry,[15] the unavoidable effect will be a loss of jobs.  The “non-partisan” Congressional Budget Office has estimated that roughly 500,000 jobs would be lost upon fully implementing a $10.10/hour minimum wage in 2016.[16]  Minimum wage laws, depending on how high the minimum wage is set, therefore, are at best smoke and mirrors used by politicians to garner votes and at worst harmful, especially to entry level workers such as teenagers and unskilled workers.


Infrastructure Spending

The Democrats argue in every election campaign that America’s schools, that roads and bridges are crumbling and that only the Democrats can save America from falling into a state of ruin.  We are hearing the same old song in 2014.[17]  Of course, the call for government spending on projects to stimulate the economy has lost much of its appeal since the 2009 Recovery Act with over $800 billion in spending and President Obama’s admission in June 2011 couched as a joke, “Shovel-ready was not as … uh .. shovel-ready as we expected.”[18]  That is why Democrats no longer talk about “stimulus” spending and instead refer to “infrastructure” spending.

The United States has spent large amounts on necessary infrastructure and continues to do so without artificial stimulus measures.  Average infrastructure spending was 3.16 percent of GDP in the years 2001-2006 and 3.36 percent in the years 2006 – 2011 which is higher than the European Union (3.00% and 3.07% respectively).[19]  This indicates that deficiencies in infrastructure despite such spending levels might be a consequence of inefficiency and even possible corruption in various infrastructure projects.[20]

Conservatives are not against spending on infrastructure, but they are against wasteful spending, i.e. investing in infrastructure projects which are not needed, at least at that time, in order to “stimulate” the economy, inefficient spending on projects in which costs have been bloated to pay off political supporters, etc.


Subsidies and Bubbles

President Obama has a tendency to show his true self in interviews and spontaneous remarks when he has to speak without a carefully crafted text and a teleprompter.  One of his most famous interview quotes just before the 2010 mid-term election: “We’re gonna punish our enemies, and we’re gonna reward our friends who stand with us on issues that are important to us.”[21]  How can a politician reward friends?  Subsidies.

Subsidies are economic benefits given by the government to businesses and individuals.  Subsidies can be in the form of direct payments such as in the $ 3 billion “cash for clunkers” program,[22] or government guarantees to secure financing such as in the Solyndra case.  Subsidies often take the form of favorable tax treatment.  The common factor in all subsidies is that the government provides economic support to one individual or group but not to others.  The inherent effect is to distort the functioning of a free market, and this necessarily leads to inefficiencies in the overall economy.[23]  Of course, politicians granting favors is fertile ground for corruption.  Is it a coincidence that over $16 billion of the so-called Department of Energy “green energy” loans went to Obama supporters?[24]

“Bubbles” happen in free markets and reflect exuberance on the part of the players in the market which increases demand.  “Bubbles” burst when the participants realize that the exuberance is not justified by reality and demand suddenly falls.  The “dot-com” bubble of the 1990s was a perfect example.[25]  However, government interference in the economy can lead to economic “bubbles” with disastrous consequences because the government fuels the exuberance well beyond the point where the market players would otherwise sober up.  Politicians are loath to put an end to the party.

The “housing bubble” of the 1990’s up to around 2007 had numerous causes, and a detailed analysis of the “housing bubble” would go far beyond the scope of this article.[26]  However, there were two general causes:

First:  The U.S. government had numerous carrot and stick policies that encouraged banks to finance homes, especially for people who would normally not be able to buy a home.  For example, no sane banker would ever have offered adjustable rate mortgages with no down payment, 1% interest and no amortization for three years if they had to keep the risk on their own books.  The government sponsored entities “Freddie” and “Fannie” encouraged organizations such as Countrywide to bundle such sub-prime loans with other mortgages and pass on the risk in the capital market using securitization and other instruments.  If a bank were reluctant to participate in the party, the bank could face sanctions for violating fair housing laws.[27]

Second:  The risks for the financial markets were recognized early, yet the political resistance to deflating the bubble was too great.  The government was fully aware of how the highly regulated banking industry worked and especially the role played by “Freddie” and “Fannie”.  The George Bush administration raised warning flags about these two government sponsored entities and the risks for the financial market throughout his term of office, starting in April 2001.[28]  However, the political resistance and especially the cover provide by such notable persons as Barney Frank kept the bubble growing.[29]  As is the case with all economic bubbles, the party eventually had to end, and the collapse came extremely close to destroying the worldwide financial system in September 2008.


Tax policy: “The Rich Need to Pay Their Fair Share”

Probably the most widespread use of class warfare involves tax policy.  The standard Democratic refrain is, “The rich need to pay their fair share.”[30]  The Democrats simply ignore the fact that people with higher incomes pay a disproportionate share of their income as taxes.  According to a report in the Wall Street Journal referencing a recent detailed analysis by the non-partisan Joint Committee on Taxation, people with annual income of $100,000 of more will represent 60% of all income and pay 95.2% of all federal income tax in 2014.  They will also pay 75.7% of overall federal taxes (income tax, payroll taxes and excise taxes).[31]

Democrats often argue that people at the lower end of the income scale still pay excise taxes and payroll taxes.  In the same article, however: “People making up to $40,000, on average, will have negative income tax rates, meaning they get more money back from the income tax system than they pay in [due to the earned income tax credit]. (They still have to pay payroll and excise taxes, which are a relatively big item for them, and their overall tax rates range from -0.9% to 9.9%.)”[32]

Despite these numbers, tax policy is still great terrain for class warfare.  Tax law is one of the most widely used tools for implementing social policies.  Someone’s ox is always getting gored, while other people get goodies.  An example almost all of us know personally in the United States is the support for the US housing industry by making mortgage interest deductible, a practice that is not common in other western economies.[33]  Tax law is especially used to favor certain players in the economy over others, using such tools as excise taxes, tax credits, deductions, reduced rates on certain types of income etc.  Tax legislation is an ideal environment for wheeling and dealing.  After all, it’s relatively easy to cut deals with other people’s, i.e. taxpayers’ money, especially when the lack of transparency in the tax system makes it so easy to hide deals.  That is quite possibly the main reason why US tax law is so complex.

The main problem for the overall economy when some groups are benefited and others punished in tax law, i.e. when the government picks winners and losers, is that the functioning of free market forces is distorted by an “uneven playing field”.[34]  This necessarily leads to loss of efficiency in the economy as a whole.

Mitt Romney had excellent suggestions for revising and simplifying the US federal tax system in the last campaign by lowering nominal tax rates while simultaneously reducing so-called “tax expenditures” (i.e. special treatment in the form of tax credits, deductions, etc.).[35]  Aside from simplifying tax law, the proposal would also have eliminated many of the distortions and resulting waste in the economy that result from favoring one group over another

* * * * *

This is the last article in this series on “Democrats – The Party of Fear” which is intended to give the readers useful information and arguments for discussions especially with liberal friends and family.  The Democratic Party and their allies in the mainstream media are extremely skilled in the use of emotional propaganda, especially because the Democrats play to fear and envy.  The only way to effectively counter the Democratic appeals to irrational fear and other base emotions is by using rational, fact based arguments to dispel the fears of our fellow citizens and show them how they are being played.  This requires knowledge and above all courage to confront the Democratic Party’s fallacious arguments.

Finally, thank you for taking the time to read these articles.  I am always grateful for comments on these articles and suggestions for future topics.  You can contact me by email at chris@arendlaw.com .

[1]      This is the fifth in a series of articles illustrating how the Democratic Party and the mainstream media use irrational fear to garner votes.  The previous articles “Democrats – The Party of Fear”, “Fear and the War on Women”, “Fear and Climate Change” and “Fear and Race” are available online at [insert generally accessible site].

[2]      The author, born and raised in California, is a lawyer admitted in California (inactive status) and Germany who practiced international corporate and finance law in Germany before moving to the Central Coast at the end of 2004.  He is a director in the Lincoln Club of San Luis Obispo County and also a member of the Central Committee of the Republican Party of San Luis Obispo County.

[3]      The debate between John Maynard Keynes and Friedrich von Hayek has continued for roughly three generations and is nowhere close to resolution (see e.g., http://www.econedlink.org/lessons/index.php?lid=593&type=student ).

[4]      This is the lead in phrase on the Obama “Organizing for Action “webpage at http://www.barackobama.com/raise-the-wage-petition/

[5]      A discussion of Adam Smith’s work would go far beyond the scope of this article.  For those who wish to read more, see, Eamonn Butler, “The Condensed Wealth of Nations” at http://www.adamsmith.org/sites/default/files/resources/condensed-WoN.pdf .

[7]      Ibid.

[8]      Chetwynd, Chetwynd, Spectore, “Corruption and Poverty: A Review of Recent Literature” (2003) at http://www.investopedia.com/terms/e/economic_efficiency.asp .

[10]     “Order in the Jungle” in The Economist, 13 March 2008, at http://www.economist.com/node/10849115 .

[11]     Just take a quick look at the lists of countries by gross domestic product per capita at http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita ; there are a couple of exceptions for tiny countries such as Qatar and Brunei which swim on oil.

[14]     Even the Democratic Party friendly Brookings Institution recognizes this, although finding that the risk would be much less when a minimum wage is set at the state or national level: “The risk of a big minimum-wage hike at the city level is that the city’s low-wage employers will be harmed in their competition with out-of-town businesses that sell the same products or services. The risk of this kind of harm is vastly smaller when the minimum wage is increased at the state or national level.” http://www.brookings.edu/blogs/up-front/posts/2014/06/09-seattle-15-minimum-wage-good-idea-burtless .

[15]     James Sherk, “Higher Fast-Food Wages: Higher Fast-Food Prices”, 4 September 2014, The Heritage Foundation, at http://www.heritage.org/research/reports/2014/09/higher-fast-food-wages-higher-fast-food-prices .

[16]     “The Effects of a Minimum-Wage Increase on Employment and Family Income”, Congressional Budget Office, 18 February 2014, at http://www.cbo.gov/publication/44995 .

[17]     “Obama Calls On Congress To Back Spending On Crumbling Infrastructure” Huffpost Politics, 14 July 2014 at http://www.huffingtonpost.com/2014/05/14/obama-congress-infrastructure_n_5325900.html .

[20]     See for a more in depth discussion, Paul Gregory “Infrastructure Gap? Look at the Facts. We Spend More Than Europe” in Forbes, 1 April 2013 at http://www.forbes.com/sites/paulroderickgregory/2013/04/01/infrastructure-gap-look-at-the-facts-we-spend-more-than-europe/ .

[21]     Quote and an attempt explain the comment at http://www.cbsnews.com/news/obama-explains-his-remark-about-punishing-enemies/ .  The use of the word “enemies” is further evidence of a class warfare mentality.

[22]     Officially called the “Car Allowance Rebate System” (CARS), detailed information at http://en.wikipedia.org/wiki/Car_Allowance_Rebate_System .

[23]     For a relatively simple discussion, see, Watkins (San Jose State University, Dept. of Economics, “The Impact of an Excise Tax or Subsidy on Price” at http://www.sjsu.edu/faculty/watkins/taximpact.htm .  The distortion of market equilibrium leads to a “deadweight loss”, also known as “”excess burden” or “allocative inefficiency”: http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Deadweight_loss.html .

[24]     Wynton Hall, “80% of ‘Green Energy” Loans went to Top Obama Supporters”, 16 November 2011 at http://www.breitbart.com/Big-Government/2011/11/16/80–of-Green-Energy-Loans-Went-to-Top-Obama-Donors .

[25]     A good description of the “dot-com” bubble can be found at http://en.wikipedia.org/wiki/Dot-com_bubble .

[26]     Wikipedia at http://en.wikipedia.org/wiki/Causes_of_the_United_States_housing_bubble has a good summary of the various causes.

[27]     See the above cite under the heading “Mandated loans”.

[29]     Doug Ross, “The Fannie Mae testimony that will make you scream in anger” 27 September 2008 at http://directorblue.blogspot.com/2008/09/testimony-that-will-have-you-pulling.html .

[30]     See e.g., “Obama: We raised taxes, but the rich still aren’t paying their fair share”, Washington Examiner, 2 January 2013 at http://washingtonexaminer.com/obama-we-raised-taxes-but-the-rich-still-arent-paying-their-fair-share/article/2517443 .

[31]     “Who Will Pay More Tax for 2014” in The Wall Street Journal, 15 April 2014, at http://blogs.wsj.com/washwire/2014/04/15/who-will-pay-more-tax-for-2014/?mod=e2tw .

[32]     Ibid.

[33]     Wikipedia contains a summary of countries that allow mortgage interest to be deducted at http://en.wikipedia.org/wiki/Home_mortgage_interest_deduction .

[34]     See with regard to the Patient Protection and Affordable Care Act (Obamacare) and the tax on certain insurance premiums, Douglas Holtz-Eakin, “Tax Policy Meets the Affordable Care Act: “The Case of the Premium Tax”, in American Action Forum, May 2012, “[The premium tax] creates an uneven playing field in which the government picks winners and losers in American’s health insurance through flawed tax policy.” (http://americanactionforum.org/sites/default/files/Premium_Tax_Fairness.pdf ).  For real aficionados who just can’t get read enough about tax, see the more esoteric example involving the competition between non-profit organizations and for-profit businesses discussed by Michael S. Knoll, “The UBIT: Leveling an Uneven Playing Field or Tilting a Level One?” in Fordham Law Review (2007) vol. 76, issue 2, Article 12 at http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=4314&context=flr .

[35]     I wrote an analysis in October 2012 which explains the concepts and also provides instruction about common terminology and basic tax concepts.  Mitt Romney’s concept makes just as much sense today as it did in 2012.  My 2012 paper can be obtained by contacting the Lincoln Club of San Luis Obispo County or the Central Committee of the Republican Party in San Luis Obispo, or you can contact me by email at chris@arendlaw.com .

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