#40 — “The Rich Are Getting Richer and the Poor Are Getting Poorer”

Max Borders

 

The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government. See the index of the published chapters here.

#40 — “The Rich Are Getting Richer and the Poor Are Getting Poorer”

(Editor’s Note: The author is director of content at the Foundation for Economic Education and editor of its journal, The Freeman.)

Imagine you could go back in time 50 years. Suppose the reason you are doing so is to put policies into place that would ensure that the rich got richer and the poor got poorer. (Why anyone would want to do this is beside the point, but stay with me.) What policies would you set?
 

  1. You would want to price poor, unskilled people out of the labor market with an ever-increasing minimum wage;
  2. You would provide special favors, artificial competitive advantages, and taxpayer subsidies to the politically well-connected (i.e., those already rich);
  3. You would stifle new, small businesses with stacks of regulations and bureaucratic paperwork;
  4. You would (literally) pay people to stay in poverty, to be dependent on government, so that any work ethic would be suppressed and eroded.
  5. You would implement an erratic and largely inflationary monetary policy that erodes savings and creates destructive booms and busts.

All five of these in combination might do the trick. Throw up barriers to the progress of the poor, or pay people to stay poor, or rig the system so the rich and politically well-connected get artificial economic advantages and chances are, the poor will indeed get poorer and the rich will get richer.

By now you have probably noticed that every one of the policies above has been implemented to varying degrees since the Great Society. And yet the poor have still not gotten poorer in the United States.

According to professional skeptic Michael Shermer:

The top-fifth income earners in the U.S. increased their share of the national income from 43 percent in 1979 to 48 percent in 2010, and the top 1 percent increased their share of the pie from 8 percent in 1979 to 13 percent in 2010. But note what has not happened: the rest have not gotten poorer. They’ve gotten richer: the income of the other quintiles increased by 49, 37, 36 and 45 percent, respectively.

Detractors will try to argue that the poorest quintiles have a smaller percentage of the overall pie. And that might be true, but the pie is much, much bigger. Would you rather have 50 percent of a million or 20 percent of a billion? Another way of putting this is: Would you rather be better off, even if that meant certain people were super well off? Or would you rather everyone were worse off, as long as everyone were relatively equal?

That the poorest among us are still, on balance, doing better today than they were 50 years ago is a remarkable testimony to what relatively free people and markets can do, even as governments put up roadblocks. So if the poor aren’t getting poorer, why do people say they are?

If one starts with the assumption that an equal distribution of wealth is the ultimate goal, then he or she is not terribly concerned with how much of that wealth is created to begin with. But some people, at least, understand that wealth has to be created and that when there is more wealth created the poorest among us will tend to be better off. The choice of starting points boils down then to whether one cares about distributing wealth evenly or growing overall wealth through productive activity.

One reason this particular cliché manages to hang around is that people generally take a static view of the economy. The idea is that wealth is like a giant pie, which neither grows nor shrinks, but gets carved up and distributed certain ways. So, some people end up with the false idea that the only way the rich can be richer is if part of the wealth pie is taken from the poor. From this they conclude justice demands a different distribution of the pie. Advocates of “meritocracy” believe the static pie should be divided according to talent and hard work. Advocates of “social justice” think the pie should be divided according to some concept of equality. Both are wrong, but the fundamental error is in thinking that wealth is a static pie to start with. It is not.

Wealth can better be imagined as a growing pie, or better, a growing ecosystem. Of course, wealth doesn’t always grow, but it tends to—as long as people have the incentives to be productive. Merit and hard work tend to be rewarded in this growing pie, but rewards more generally accrue to those who create value for others.

In other words, someone who works really hard might not be rewarded if no one finds his work valuable—say, a man who digs ditches and fills them up again. Likewise, work that might be considered meritorious in an obscure academic journal might not confer any earthly good on humanity outside of the journals’ four-person review committee.

Advocates of so-called social justice want the wealth pie to be divided according to an arbitrary and subjective abstraction like “fairness” or equal outcomes. But carving up wealth according to some nebulous concept of justice ignores the actual ecosystem in which people operate. In other words, such a concept ignores the behaviors, incentives and exchanges that encourage people to be productive—i.e. to generate wealth. By distributing from rich to poor, you end up paying poorer people to be less productive, while punishing more productive people. The distribution that would flow from people making more goods and services available to all is lost by degree, making everyone worse off. If taxation and redistribution for the sake of equal outcomes makes us all worse off than we would otherwise have been, how is this social justice?

Egalitarian concepts of social justice also ignore any moral considerations that might attach to how an unequal distribution might have come about. If growing overall wealth is about people creating different degrees of value for each other, and taking different risks, then the rewards of value creation will never flow equally. Some people will make more money than others, for example, whether it’s because they were smarter investors, cleverer innovators, or better organizers. The rest of us enjoy the fruits of those efforts, so we might want successful people to keep investing, innovating and organizing — even if that means they get richer. And we might want to acknowledge that they deserve what they have.

(Editor’s Note: Economist Thomas Sowell has said, “Since this is an era when many people are concerned about ‘fairness’ and ‘social justice,’ what is your ‘fair share’ of what someone else has worked for?” I often ask this question of a redistributionist in the presence of another person and ask the former to specifically tell me how much is his ‘fair share’ of what the other person in our presence has earned. I’m still waiting for a satisfactory answer.)

Those of us who are not as productive (or, politically well-connected, as the case may be) still enjoy remarkable abundance in relatively free societies. In the United States, for example, all quintiles have become wealthier overall, over the last 30 years.

It is also true that there are fewer desperately poor people around the world. In only 20 years, extreme global poverty has been cut in half.  That is a remarkable achievement—one that is attributable to policies of liberalization (freer markets) around the world, which progressive activists and egalitarians decry. In other words, those who say the poor are getting poorer are simply wrong. And there are hundreds of millions of people thriving today who can talk about how much better things have gotten.

Summary

  • Progressives should be honest and admit that the anti-free market policies they’ve promoted and achieved in the last half-century have disadvantaged the poor and conferred favors upon the rich and politically well-connected.
  • Amazingly, in spite of those policies, the poor overall are still better off than they were 50 years ago. Imagine the progress that might have happened had these policies not been in place!
  • Redistributing wealth is just slicing the pie differently, at the risk of shrinking the pie. It’s a static view of wealth, one that’s greatly inferior to a view of baking a bigger pie for everybody.
  • For further information, see:

“How the World is Getting Better” by Phil Harvey: http://tinyurl.com/k4nb54t

“The World is Getting Better” by Sam Harris: http://tinyurl.com/7hfpoaq

“The Free Market: Lifting All Boats” by Don Mathews: http://tinyurl.com/oq4ay5x

“Dear Ultra-Rich Man” by Max Borders: http://tinyurl.com/ljlfsff

“Free the Poor” by Julian Adorney: http://tinyurl.com/n35q283

“The Quackery of Equality” by Lawrence W. Reed: http://tinyurl.com/khsmv88
 

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