AN ETHICAL CONUNDRUM: IS THE REPUBLIC IN JEOPARDY?

An Ethical Conundrum: Is the Republic in Jeopardy?

Thomas W. Harvey, DBA[1]

Executive Director

The Center for Ethics in Financial Education

Barbara A. Diou, DBA

Director of Research

The Center for Ethics in Financial education

John Boatright[2] defined ETHICS in financial matters as moral norms that apply to business activities in the financial markets and in financial institutions, especially to those persons involved in management. He continued that financial activity is governed by detailed rules and an expectation of a high level of integrity which he defined as personal values, moral beliefs, and a commitment to doing the right thing, even when it would be inconvenient or painful.

Merriam Webster defines “conundrum” as a question or problem having only a conjectural answer and an intricate and difficult problem.  We would add that a conundrum is an issue for which there is no resolution.

With that as the basis for this paper, a lot has been, and will be, said in the presidential primary campaigns about the role of the federal government in the lives of the American people.  The Republicans say they want to reduce the size and influence of government while the Democrats have the opposite view.  A recent Google search revealed that 37.3% of Americans receive some kind of government support, so over one (1) out of every three (3) people in this country are on the dole in one way or another.  That is over 100 million people.  Then, there is an additional 26.9% of the population who live in a household with someone on Medicaid, another government subsidiary, albeit a necessary one for those who are ill and cannot afford treatment.  How does the government pay for this?  Simple, through taxes, which are not nearly enough, and then borrowing which increases the national debt.

As far back as 1776, the subject of individual entitlement and the role of government was being debated and was the subject of discussion before that as we shall see in the academic relationship between the Scottish moral philosopher, Adam Smith, and the American patriot, Benjamin Franklin.  Smith took the position that free people should have the right to pursue their own self-interest to the degree that they want as long as that pursuit did not infringe upon the rights of others.  Essentially, he was talking about the freedom to work as hard as people wanted, whether that was eighteen (18) hours a day or six (6).  It was all a matter of personal preference, the basis of the liberty he espoused for all people.

Smith also had an opinion about the role of government.  In his mind, the system of natural liberty, that is the freedom to pursue your own self-interest, left the central government with just three (3) duties:  defense of the country; the administration of justice; and maintenance of certain public works which would include such things here in the United States as the national parks, federal buildings, various monuments and other recognizable artifacts, museums like the Smithsonian, and the like. 

There is nothing in Smith’s writings about government being involved in health care, banking and other forms of interstate commerce, political campaigns, education, the private and personal data stored in cell phones or tablets, or anything else for that matter.  However, Smith also recognized the “dark side” of human beings that resulted in them not always behaving in a fair and ethical way, that is, infringing on the rights of others.  The behavior that led to the financial Crash of 2008 was a perfect example of people doing just that, and the federal government had to get involved.  The need for effective regulation, therefore, is an additional role that government must play, although Smith did not address it.  As an aside, the banking regulation we had in the first decade of this century did not result in any criminal proceedings, as it should have, just ethical and moral outrage.

What makes this interesting is that Benjamin Franklin was one of Smith’s prized students who debated with the rest of the founders about the importance of including natural liberty in the Declaration of Independence and the Constitution and limiting the size of the federal government.   He was the champion of the middle class and worked tirelessly to make sure that it was represented well in the new country.

It would have been insightful to have listened to the arguments of Franklin, John Adams, Thomas Jefferson, Alexander Hamilton, and the other founders, especially Hamilton about the power of the federal government.  But unlike today in the United States, these political adversaries were able to compromise as they followed Franklin’s advice about the middle class and the role of government that he had learned from Adam Smith.  So, what has happened?  Why are Americans not pursuing their own self-interest to the degree that they want, not infringing on the rights of others.  And, why has the government grown to the incredible size it has with $19 trillion in debt as of this writing with another $4 trillion in liabilities on the balance sheet of the Federal Reserve.  We have basically mortgaged the future for generations of Americans to come.

From the numbers, it appears that more and more people are looking for government subsidies, instead of working, and then we hear phrases like “redistribution of wealth” from the people who have the wealth to people who do not.   We will get to that shortly.  To pay for those subsidies, taxes are not sufficient so the government has to borrow.  As of this writing, the amount of federal debt increases by approximately $800,000 per minute. 

Government continues to grow in terms of its influence in the lives of everyday Americans to the point where one candidate for his party’s nomination for the office of President wants to make a university education free at public institutions of higher learning.  If that happens, teenagers would learn that they can coast through high school and not have to earn admission to college.  What does that say about how they will approach their lives as adults?  Coast along and the government will take care of you?  And then, who is to pay for it?  Taxing the wealthy, of course; the people who have pursued their self-interest vigorously which is wealth redistribution to the extreme.

What happened to “earning” a college education or a living, for that matter, as Adam Smith prescribed?  How does that fit with pursuit of self-interest and working hard to improve yourself and your life?  The answer will be that he advanced his ideas 240 years ago, and things are different now.  Yes, they are, but if you ask any successful entrepreneur about it, the answer will be passionate pursuit of self-interest to the degree that is wanted.  Look at Richard Branson, Mark Zuckerberg, Ray Kroc, Michael Bloomberg, Mark Cuban, Steve Jobs, and Phil Knight, among many, many others.  You get the idea.  These people had a vision and pursued it with vigor to the point where they had more money than they knew what to do with.  Did they pursue their own self-interest?  Yes!  Did they infringe on the rights of others?  We don’t know!  But they were entrepreneurs who did not rely on wealth redistribution.  They are examples of people who were/are targeted to pay for wealth redistribution with their taxes.

With 37% of the American population receiving government benefits and wealth being redistributed through tax increases, it appears that the United States is headed for a socialistic economy rather than a capitalistic one.  If the money of the government is there for the taking, people will take it, willingly, and will not have to work for it.  So, legislators will continue programs that provide it, and add to them.  Why? They make the people who are taking those monies feel good about their government and the people who give them those benefits and, thus, they will vote for them again.  It’s only human nature, but it is the easy way out.

A recent survey by Republican pollster Frank Luntz, sampled 1,000 Americans between the ages of 18 and 26 and revealed that 58% preferred socialism to 33% who preferred capitalism as a more compassionate economic system.  That figures because the millennial generation feels that they do not have to work to have a good life.  They expect the government to foot the bill for the luxurious life to which they think they are entitled.

What the government officials in Washington haven’t thought about, or maybe they have and just ignore, is the fact that socialism has never worked.  We are reminded of a quote from Winston Churchill who said…

Socialism is one of the oldest and most expounded delusions and fallacies

which this world has been afflicted by.  It consists of not merely in a leveling

of mankind but in keeping them level once they have been beaten down.

But, more and more people want the government to give them something for nothing, except their vote.  John F. Kennedy, as we all know, said “Ask not what your country can do for you.  Ask what you can do for your country.”  That means serving the country whether in the military or by working hard and adding to GDP, making money for themselves, buying groceries and other necessities, supporting their churches and charitable organizations, and paying their taxes, or going to school to become a productive member of society.   The current trend toward entitlement means that people could have the tendency to coast.  But also, the government may raise tax rates to redistribute the wealth in order to provide additional subsidies.  That becomes a negative incentive for people to become entrepreneurs in pursuit of their own self-interest; or to have the ambition and drive to be successful in business, education, the non-profit sector, or any walk of life.  It basically dulls the entrepreneurial spirit of free enterprise which Adam Smith advanced and upon which this country was founded.  It is also a disincentive to working hard at anything which could change the American culture from one based on hard work and free enterprise to one that is not.  If that happens, what becomes of our current place in the structure of the world?

The politicians in Washington see entitlement and big government as good for themselves for a couple of reasons.  First, as mentioned, if they give people more subsidies, those people will think kindly of them and cast their vote for them, as we must remember that in the minds of those elected officials, their primary job is to get re-elected, not to serve their constituents, regardless of what the television ads claim.  Benjamin Franklin warned that: “When the people find that they can vote themselves money, that will herald the end of the republic.”  By voting for people who give them things, those entitled citizens are doing just that.

Here’s the ethical issue.  Congress raises taxes and increases the national debt to entitle more and more people in an effort to get re-elected.  In the process, they put future generations of Americans in jeopardy financially to the point where the current debt may never be retired, but which will put enormous financial pressure on them and the country as a whole.  Thus, according to Boatright’s definition of ethics, voting to limit or end entitlements and to shrink the government would, in fact, be both inconvenient and painful for our legislators as they might not be re-elected.

The second reason that they see entitlement and big government as good is that it gives them a sense of power, tempered by a sense that they are doing something nice for people.  So, cutting the entitlement would mean fewer votes, less power, and hurt feelings on the part of those who received those.  In this age of political correctness, we certainly couldn’t have that and, perhaps, here in 2016, as Franklin suggested, the republic already IS in jeopardy.

As an aside about political correctness and not wanting to hurt anyone’s feelings, here is a case in point.  There is a recreational department in a local suburb that shut down its Little League baseball program because parents were complaining that all of the players were receiving trophies just for participating, not just for those on the teams that earned a championship.  The parents’ concern was that all of these players would feel entitled to a trophy even if they lost, or even if they didn’t play at all.  What message does that send?  Whatever happened to the word “earn?”  The city officials just wanted to make all of the children feel good, and bravo to the parents for saying that wasn’t right.  But, instead of changing the policy, the city simply bailed out and cut the program altogether at a cost to the children of their healthy athletic activity.  It is apparent, therefore, we are teaching entitlement at a very young age so children will grow up expecting the government to give them a college education and a living when they graduate.  But, we never teach them the cost and that you have to earn what you get in life.

Professional football player James Harrison of the Pittsburgh Steelers had a similar experience.

I came home to find out that my boys received two trophies for nothing,

participation trophies.  While I am very proud of my boys for everything

they do and will encourage them till the day I die, these trophies will be

given back until they EARN a real trophy.  I’m sorry I’m not sorry for

believing that everything in life should be earned and I’m not about to

raise my boys to be men my making them believe they are entitled to

something just because they tried their best…cause sometimes your best

is not enough, and that should drive you to want to do better…not cry and

whine until somebody gives you something to shut you up and keep you

happy.

Thank you, Mr. Harrison.  Well said and exactly the point.  Pursuit of self-interest, entrepreneurship, and a limited role of government is what this country needs, capitalism at its best; just what Adam Smith pointed out 240 years ago and Benjamin Franklin worked so hard to achieve for this country.  Sadly, we fear that entitlement and big government are here to stay.  Why would any of the 37% vote for someone who would cut the programs that gives them money.  They wouldn’t.  So, by definition, as long as those entitlements keep coming, the government will keep, and add to, them, thus becoming larger even still.

That means more debt and higher taxes, and slower growth.  Lowering taxes, on the other hand, results in higher levels of entrepreneurship and employment, business expansion, and higher productivity and personal and corporate earnings, not to mention a favorable impact on the stock market.  Lower taxes actually means more tax dollars since more people are paying them.  And, if people are working in their own self-interest are not infringing in the rights of others, and are earning a living, they can choose where to allocate that money, paying appropriate, but fair, amount of tax.  I just wish the politicians understood that.

To conclude, the question becomes how the United States might return to the natural liberty Adam Smith introduced for people to take personal responsibility for their own futures and Benjamin Franklin insisted should be a part of the fundamental fabric of the United States.  It is too bad, but we are not optimistic that we can reverse the growing dependence on entitlement and the ever-increasing role of government.

The purpose of the Center for Ethics in Financial Education is to surface ethical issues for thought, dialogue, and solutions, if possible.   We would like to know what you think about increasing entitlement and role of big government in the United States.

[1] Doctor of Business Administration.  Retired Professor of Finance at the Dauch College of Business and Economics at Ashland (OH.) University.  Co-author of Quality Value Banking (John Wiley & Sons, 1992) and The Banking Revolution (Richard D. Irwin, 1996).

[2] Raymond C. Baumhart, S.J. Professor of Business Ethics and Professor of Management in the Graduate School of Business at Loyola University Chicago. Co-author of Ethics and the Conduct of Business, 4th ed. (Prentice-Hall, 2003) and Ethics in Finance, (Blackwell, 1999).