All Commentary
Wednesday, May 1, 1968

Statistics and Poverty

Mr. Smith is a businessman in California.

The London Times several years ago described the British socialist experiment as “competition with­out prizes, boredom without hope, war without victory, and statistics without end.”

Government intervention in the economy often is based upon spe­cious arguments and statistics de­signed to back them up. But sta­tistics, while purportedly facts, fail to perform one important function. They do not analyze cause and effect.

Government statisticians glory in the growth of the national prod­uct, as though government had caused such growth. Thus, the rooster would cause the sun to rise!

Governments consume and dis­sipate wealth rather than produce it. Goods and services are forcibly taken from the wealth-creating private sector to cover losses in­curred on government ventures in finance, insurance, real estate, communications, public utilities, and other economic activities. If the government could create wealth, there would be no need for taxation.

Government statisticians also attempt to prove the stabilizing effect of political controls. The great bid for government spon­sored stability came with adop­tion in 1913 of the Federal Re­serve system, supposed to stabilize both the economy and the cur­rency. Yet, the cyclical pattern of the economy has continued, with a frequency and amplitude simi­lar to that prior to 1913. The one great exception: after sixteen years of Federal Reserve stabili­zation, there occurred the most severe economic depression ever recorded.

As for currency, all nations have suffered disastrously from inflation and fiscal mismanage­ment following displacement of the gold standard by government controlled central banking. Other nations have known worse, but even the American dollar has lost two-thirds of its purchasing power under political management since 1913.

Statistics purportedly show gov­ernments successfully maintaining full employment. The more totali­tarian regimes do it through forced labor and a low rate of productivity per worker — some­thing like having two workmen fill each job. The United States achieves high employment by ab­sorbing many workers into gov­ernment ranks and subsidizing others. During the 1920′s unem­ployment averaged less than 4 per cent while about 6 per cent of the work force was employed by Fed­eral, state, and local governments and the armed forces. The latest available figures still show about 4 per cent unemployed, whereas gov­ernment employees and members of the armed forces now account for 18.5 per cent of the work force.

Government statisticians would have us believe that maximum employment is attained through adroit official planning. We see, however, that it is accomplished through government hiring, at taxpayers’ expense.

Among the most popular argu­ments for government interven­tion is the necessity for redistri­bution of income. Businessmen are too selfish to effect an equitable distribution, say the planners, and only impartial government officials can bring about “social justice.” The New Deal, Fair Deal, New Frontier, and War on Poverty identify successive attempts by government to rearrange incomes in a new and “fairer” pattern, all to the net effect that the poor are still with us.

The following breakdown of family income statistics, prepared by the Bureau of the Census and adjusted to dollars of 1965 pur­chasing power, might give the impression that government re­distribution plans had succeeded:

It would seem that in the days of the Fair Deal 30 per cent of the families were impoverished with less than $3,000 per year and that the number had shrunk to only 17 per cent under the Great Society. All that the figures prove, however, is that there has been a constantly rising standard of liv­ing. This can be attributed to one cause only — the creation of new wealth, an entirely private func­tion. When constantly increasing incomes are fitted to fixed income brackets it appears that the dis­tribution of income is also vary­ing. Socialists point to this statis­tical aberration as proof that the graduated income tax, the pres­sure of labor unions, and govern­ment control of the economy in general have had the effect of forcing the rich to disgorge part of their income and pass it down to the less fortunate.

However, there is an impartial statistical process which elimi­nates the effect of a rising living standard on the pattern of income distribution and resolves the arg­ument as to whether government planning or the free market is responsible for the manner in which incomes are apportioned. This is done by showing the per­centage of the national income received by each fifth of the fam­ilies over the same series of years. Also shown for each year is the percentage of national income re­ceived by the top 5 per cent of all families:

Except for some slight scalping of the very top earners, it appears that the various government “deals” in modern America have achieved no significant redistribu­tion of incomes among families. The 40 per cent of all families with lowest incomes still receive the same 17 per cent of the na­tional total.

Dr. Gabriel Kolko, generally fav­oring bigger and better taxes in his book, Wealth and Power in America, states: “The basic distribution of income and wealth in the United States is essentially the same now as it was in 1939, or even 1910.” Even the powerful graduated income tax seems to affect the pattern but little. This may be explained in part by the fact that costs of redistributing income may exceed the amount reshuffled. The “commission” for this service is apparently high and stays in the hands of the relatively well-paid social workers and pov­erty fighters — many of whom are in the top 10 per cent of income earners. Other government inter­ventions, such as minimum wage laws, cause unemployment among the poor and tend to reduce the percentage of income received by the lowest groups. It might be pointed out that the government taxes the poor also. A study by the Tax Foundation estimates that 28 per cent of incomes under $2,000 a year goes for taxes.

At the close of the nineteenth century an Italian scholar named Pareto made a study of income distribution in times past wher­ever he could find that an income tax had been levied. Such a tax is the only source of statistics for such a study. He found a church-imposed income tax in Peru some 200 years ago, certain income taxes in Europe over the centuries, and the American income tax dur­ing the Civil War. Income dis­tribution proved to be startlingly consistent regardless of time, place, or degree of tax graduation, the pattern very much resembling that shown by more recent sta­tistics for families in the United States.

Writing in 1928, the economist, Joseph Schumpeter, had this to say about his exhaustive study of nineteenth century Britain:

Until about forty years ago many economists besides Marx believed that the capitalist process tended to change relative shares in the na­tional total so that the obvious in­ference from our average might be invalidated by the rich growing richer and the poor growing poorer, at least relatively. But there is no such tendency. Whatever may be thought of the statistical measures devised for the purpose, this much is certain: that the structure of the pyramid of incomes, expressed in terms of money, has not greatly changed during the period covered by our material — which for Eng­land covers the whole of the nine­teenth century — and that the rela­tive share of wages plus salary has also been relatively constant over time. There is, so long as we are discussing what the capitalist en­gine might do if left to itself, no reason to believe that the distribu­tion of incomes or the dispersion about our average could in 1978 be significantly different from what it was in 1928.

So often it is stated that in un­developed countries there are only two classes — the very rich and the very poor. This is an economic illusion. In a country such as India with per capita income un­der $100 per year, there appears to be nothing but poverty. Any man of means stands out in star­tling contrast to his impoverished surroundings and creates the im­pression that there is no middle class. But careful analysis will reveal a pattern of income dis­tribution similar to that in the more advanced countries — all fol­lowing Pareto’s curve.

The only antidote to poverty is wealth. And wealth, by definition, is created by those who make themselves wealthy through serv­ing others in open exchange. Fred Kent’s story of The Well helps to explain why this is true.

In a pastoral community composed of 101 independent and self-suffi­cient farmers, each worked 13 hours per day to keep body and soul to­gether. Other than rain, the only source of water was a spring on a hillside which each farmer visited each day. This cost him an hour of work daily. Working overtime, one of the farmers dug a trench down to the valley and by forming a well, provided running water to each of the farmers for which he charged 1/2 hour of work per day. As can be seen, the provident farmer became rich to the extent of having 50 hours of labor redound to his benefit daily, yet each member of the community benefited by 1/z hour less work per day.

Wherever the heavy hand of government interferes in economic affairs, things become more ex­pensive rather than cheaper. Hos­pitalization, education, and postal rates, for example, grow ever more costly while private enter­prise continues to create more and better and cheaper products and services.

You can be sure that if each Asian worker were backed by $30,000 in capital, there would be no mass starvation and no 25-year limit on the average life span. Such is the miracle of wealth. Only a few know how to create it. And the impartial and all-wise free market will distribute it in a manner which creates harmony rather than conflict among men.

The American economist John Bates Clark observed years ago:

Free competition tends to give to labor what labor creates, to capital­ists what capital creates, and to the entrepreneurs what the coordinating function creates. To each agent a distinguishable share in production, to each a corresponding reward —such is the natural law of distribu­tion.