Breaking down Peter Schiff’s defense of the 1%

Peter Schiff – In Defense of the 1%

Peter Schiff recently visited OWS, in an effort to “understand what was motivating these protesters and try to educate them about what caused the financial crisis.” Schiff is an Austrian brand economist who strongly believes the roots of the crisis are found in big govt. But his argument tends to fall apart at the seams, when placed under close scrutiny.

(The protesters) might shout, “the banks have taken over the regulatory agencies, so we need more regulations!” Obviously, this is paradoxical. If they’re blaming government for causing this problem, why would they suggest more government as the solution?

This deductive logic seems to make perfect sense on the surface, but pragmatically it is useless. The German govt was taken over by Nazis. This doesn’t make govt, in and of itself, wrong or ineffective or inevitably susceptible to corruption to the point of being inappropriate for society. The solution post-WW2 wasn’t to create a Germany without a govt. The solution was to replace the Nazi regime with a new govt. Similarly in today’s world, it is indeed true that poor regulations delivered us to this economic debacle. But that doesn’t mean we dismantle or just give up on them. Instead, we replace them with new regulations, ones designed to prevent the general types of malfeasance that caused the crisis.

The vast majority of protesters I met did believe in capitalism – they’re just tired of being screwed over by crony capitalism. Noted school-choice activist Michael Strong calls it “crapitalism,” and that’s what it is. It’s a rotten deal for everyone, and they know it.

On this point, I think we all can (and should) agree.

The problem is that many of these people are under the mistaken impression that Wall Street banks are to blame for this state of affairs. That’s like blaming the dogs for getting into the trashcan. Sure, it’s bad behavior, but the ultimate responsibility lies with the authority figures – in this case, Washington.

This analogy is clever, but it is false and misleading. First, Wall Street is operated by humans, not dogs. We can and should hold them accountable for their bad behavior. Second, Schiff assigns “ultimate responsibility with the authority figures”. Schiff intends to make the point that govt itself is the problem. However, the analogy actually implies that govt needs to restrain misbehaving Wall Street types, lest they run wild due to their inherent impulsive reckless greed. The dog analogy suggests the owner should leash his dog to prevent it from tearing into the trash. Extending it this way, it suggest that Wall Street as well must be “leashed” — by proper regulations decreed by the authority figures. However, Schiff derided regulations in the previous paragraph. So his message here is a bit muddled and inconsistent.

And while wealthy New Yorkers have historically made their living providing essential financial services to the global economy, Washington has always made its living one way: at our expense.

I think it would be hard to convince most people that $600 trillion in credit-default swaps and interest-rate swaps and other financial derivatives currently hanging over the global economy are the bi-product of “essential services”. Meanwhile, govt provides services like school systems, paved roads, police and fire, which most people consider worthwhile. Schiff’s characterizations here are unreasonable and ignorant representations of reality.

I have trouble sympathizing with people calling themselves the “99%”, implying they stand in opposition to wealth no matter how it’s earned.

This is a manipulative and incorrect and flat out ridiculous implication of the “99%” and what they stand for. The 99% are not opposed to wealth. Totally absurd rhetoric from Schiff here.

I own a brokerage firm, but I didn’t receive any bailout money. In fact, I have to work twice as hard to compete with bigger financial firms that are propped up by the US government. The least I deserve is the ability to keep what I earn.

No bailout money? Good. You have to work twice as hard as govt-backed firms? This is bad. It’s part of the problem, and we should work together to fix it. The least you deserve? You don’t “deserve” anything, Peter Schiff. No one does. Remove “deserve” from all your arguments, because it’s entirely too subjective a term for rational debate.

The other tool the government didn’t have to use against us back then was the Federal Reserve. Even if we drastically reduce taxes, the Fed might decide to do what it has been doing: printing money to finance government profligacy. This acts as a secret tax on everyone with a bank account, and is critical in transferring wealth from hardworking Americans to politically connected elites.

Inflation is not a “secret tax”. Calling it such is just a manipulative technique to get people to think of it as some underhanded govt conspiracy to take your money. Nor is it “critical in transferring wealth from hardworking Americans to politically connected elites.” Inflation in and of itself negatively affects creditors — i.e. people with lots of money (i.e. the rich “politically connected elites”). On the flip side, inflation positively affects debtors — i.e. people struggling to make ends meet (i.e the bulk of “hardworking Americans”).

One common refrain I heard at the protests was that our problems result from the rich not paying enough taxes. Most feel that economy was better when marginal tax rates were higher, and that lower rates are a cause of financial decline. Forget about the faulty logic of this assumption, it ignores two key points. First, while it’s true that marginal tax rates were much higher after World War II, the tax code also used to contain many allowances and exceptions, such that very few people actually paid the nominal rate. Second, prior to 1913, the rich paid no income taxes at all; yet, lower- and middle-class living standards rose much faster in the 19th century than in the 20th!

A few misleading statements here. First, the tax code still contains many allowances and exceptions, even as the nominal rates have fallen significantly in the last 30 years. Due to these allowances and exceptions, many huge corporations pay 0% in taxes, and the top 400 earners in America pay an effective rate of 17%. I pay about 28% (and I’m nowhere near the incomes of the top 400). Second, Schiff has absolutely zero evidence to support his claim that “living standards rose much faster in the 19th century than in the 20th”. It’s a baseless statement, without context. Which standards, exactly? At the start of the 19th century, America was a mostly agrarian society with some industry. At the end, we were pretty much the same. At the end of the 20th century, however, we had cars, planes, cell phones, laptop computers, internet, and then some. All of these devices drastically improved the living standards of nearly every American. And they’re all 20th century inventions. So what, exactly, is Schiff talking about? Let’s just write this off as pointless nonsense. And even if he did have some obscure statistic, it’s an ideological leap to think that tax rates had anything to do with it.

Overall, I think there was a real lack of understanding of basic economic principles among the Occupiers. Protesters thought that the rich owed a duty to share their wealth with society. However, they failed to see that in true capitalism, the rich can only acquire their wealth by serving others. No one succeeds in a vacuum. Of course, the idea that Occupy Wall Street protesters have a right to share directly in the private profits earned by others is immoral.

True, no one succeeds in a vacuum. And the “others” that Schiff mentions, acquire the wealth that they eventually transfer to the rich, by serving the rich. We are all in service to each other. That’s a basic principle of an economy. Perhaps Schiff understands this, but he puts greater moral emphasis on the flow of “service” from the rich to the “others”, and on the flow of wealth from the “others” to the rich. This is merely his subjective ideological opinion. He has a right to that opinion, but it doesn’t make it an economic or moral principle (no matter how many times he states it so matter-of-factly using terms like “of course”). The basic economic principle that allows the wealthy to become wealthy is that they charge more for their services than what they’re worth, while the “others” are paid less for their services than what they’re worth. This is economic fact. Does it “deserve” to be this way? No (as I said before, nothing’s “deserved”). But it is this way, and economic advancement works well with this type of asymmetry (i.e. “incentives”). Most people are OK with that — so long as it doesn’t feel like the elites are squeezing the life out of the working class (which, for many people today, it does).

Consider the late Steve Jobs…

I’ll just stop right there. I think it’s fair to say, nobody at OWS has a problem with Steve Jobs. Steve Jobs created his wealth by creating wealth for others. Every reasonably minded person in the world should have no problem with someone getting rich this way. Steve Jobs did not work on Wall Street. It’s not “Occupy Cupertino”. Wall Street created its wealth by peddling financial derivatives that turned the investment world into a casino — one where the odds are heavily tilted in Wall Street’s favor. No iPhones were built thanks to a derivative. The only things derivatives produce are fees for Wall Street banks and big paydays for hedge funds who gamble right.

I’m calling for these protesters to educate themselves on the causes of the current financial decline and not to waste their time attacking the wrong target. They have every right to be angry, but also an obligation to be part of the solution. Yes, I am the 1% – but I’ve earned every penny. Instead of trying to take my wealth away, I hope they learn from my example.

It’s impossible for them all to “learn from his example”, because it is impossible for them all to become wealthy like Schiff. As I mentioned before, it’s a basic economic fact that in order for one to acquire monetary wealth, symmetric economic forces must deprive wealth from someone else. We can’t all be CEO’s for brokerage firms. Somebody’s got to take out Schiff’s garbage and make sure the dogs don’t tear into it. And those people will most likely be paid less than their service is worth, such that Schiff can become rich.