Tuesday, November 04, 2008

Poor Aren't Poor Because Rich Are Rich; Making The Rich Poorer Doesn't Make Everyone Else Rich

Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap — though still vast — between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn't better off.

By and large, the poor aren't poor because the rich are rich. They're usually poor for their own reasons: family breakdown, low skills, destructive personal habits and plain bad luck.

And making the rich poorer doesn't make everyone else richer. Scapegoating and punishing all of the rich won't do us any good if the resulting taxes dull investment and risk-taking, discouraging economic growth that benefits everyone.

~Robert Samuelson

HT: Greg Mankiw

33 Comments:

At 11/04/2008 9:48 PM, Anonymous Anonymous said...

The Poor are Poor because of the lack of jobs which pay a livable wage.

In many states the only job growth is in the service Industries, i.e. minimum wage jobs.

 
At 11/04/2008 10:01 PM, Anonymous Anonymous said...

Yes, I worked in menial labour jobs in the service industry to earn money for college. It was tough to pay rent and college tuition. After college, I earned a lot more.

So, was the problem that I was able to find a low paying job that matched my low skill level or is the problem that some people who find such jobs decide not to make the effort to move on?

Hmmmm....toughie

 
At 11/04/2008 10:03 PM, Anonymous wyatt said...

Do you really think that people get paid less than what they are worth? That is what you are implying in the first post above.

People may in the short-run get paid less than what they are worth, but in the long-run you will get paid what you are worth. You cannot just artifically create jobs through government programs that pay a "livable wage". The market will not support it and it will not be sustainable.

Minimum wage is just an abitrary floor possed on wages that the government sets. It actually hurts those whom's skills do not justify that high of wage, therefore increasing the unemployment rate for those individuals. Look at the DOL unemployment statistics around the time periods that minimum wage has been increased. You will see an increase in teenagers and african-americans unemployment rate.

 
At 11/04/2008 10:40 PM, Anonymous qt said...

Anon.,

The service sector also includes insurance, accounting, tech support, engineering, architecture, library science, records management, museology, legal practice, banking, investment, healthcare, business and personal services as well as government services.

Job losses are being seen across all sectors particularly in retail, hotel, manufacturing, and construction which does not support the idea that there is any growth in low wage jobs. The sectors which appear to be holding up are healthcare and government service jobs which are not min. wage jobs.

Low skilled workers are at a considerable disadvantage at present due to the trend away from manufacturing towards knowledge based jobs, a shift that has been unfolding for several decades. While agricultural workers were able to transition to blue collar jobs in the 20th century, workers who lack a high school education are not able to make the leap to management jobs in a service dominated economy. Denmark offers a model for helping these citizens to adapt to a changing world economy./flexicurity.html

A little statistical analysis on those who actually earn minimum wage confirms that the vast majority of minimum wage earners are under the age of 25. High school and university students working part-time do not constitute a permanent underclass that most of us would associate with the concept of poverty. They merely start in a low skill position and in a few years, get a better job.

 
At 11/04/2008 10:43 PM, Anonymous qt said...

Let's try this again...

Link on Denmark

 
At 11/04/2008 10:53 PM, Anonymous Machiavelli999 said...

Making rich people poorer doesn't make poor people richer.

BUT, giving rich people tax breaks and hoping that they use that money to invest in new businesses also doesn't work because they just pocket that money into their savings.

Not regulating a financial industry that relies on trust and exists because of sensible regulation leads to economic disaster and destroys jobs.

Running up huge fiscal deficits and running loose monetary policy for years leads to inflation and asset bubbles which cause economic disaster when they pop.

Taxes are not the be all and end all of economic policy.

 
At 11/04/2008 11:20 PM, Anonymous Anonymous said...

It's a great time to be a bum. Working your ass off, getting the crap taxed out of you and then having to beg the bank to let you borrow your own money back and pay them interest on top is for suckers. No thank you, and as for you employees. Your fired.

 
At 11/04/2008 11:45 PM, Blogger like such as said...

"BUT, giving rich people tax breaks and hoping that they use that money to invest in new businesses also doesn't work because they just pocket that money into their savings."

What exactly do you suppose 'pocketing money into savings' could be? Is that somehow not investing?

When "the rich" put their money into a bank (which is apparently where the system breaks down in your view), banks have more to lend. This lowers interest rates, leading to increased borrowing, leading to increased investment etc.

We don't live in a barter economy. We don't need to personally find businesses to invest our money into (though we can if we want). Banks do it for us, and much more efficiently.

As for the rest of your comments, those are unrelated to this post.

 
At 11/04/2008 11:51 PM, Anonymous Machiavelli999 said...

"Banks do it for us, and much more efficiently."

Yes, banks have definitely allocated capital very efficiently these past few years.

 
At 11/05/2008 12:01 AM, Anonymous Machiavelli999 said...

Also, there has been this "supply-side" theory these past few years that if you give tax cuts to the rich and corporations they will use that money to produce jobs.

That's simply not true. Imagine a company that makes refrigerators. You make 1,000 refrigerators every year and you make $100 off of each fridge. You pay 10% taxes.

Now lets say taxes are cut to 5% and instead of 90 dollars per fridge you make 95. Well, thats great for you, but your market is still 1,000 refrigerators and you will still hire the same number of people. Nothing will change except you have more savings.

Now that would be fine if we had a solid financial system, but we don't. Our financial system focuses on short term gains, which is the natural things for institutions to do when there isn't a proper regulatory framework.

 
At 11/05/2008 12:13 AM, Anonymous Anonymous said...

BUT, giving rich people tax breaks and hoping that they use that money to invest in new businesses also doesn't work because they just pocket that money into their savings.

Small econ lesson: Savings = investing. The "rich", a.k.a. high earners, tend to save (read:invest) their tax cuts. The middle class tends to consume them all. This is why when taxes are lowered on higher earners, investment and tax revenue go up and when taxes are lowered for the middle class, tax revenue goes down. Politically unpopular but true.

Not regulating a financial industry that relies on trust and exists because of sensible regulation leads to economic disaster and destroys jobs.

I have been in the financial industry for a long time. It is one of the most regulated industries in this country. I can't sneeze without checking with my compliance department first. The industry is over-regulated to the point that it's approaching central planning. And central planning works about as well here as it did in the USSR.

Running up huge fiscal deficits and running loose monetary policy for years leads to inflation and asset bubbles which cause economic disaster when they pop.

Time for another econ lesson: the Fed is theoretically an independent body (when Bernanke is not orgasmically pandering to the Democrats, that is). Congress will spend what it wants but it has nothing to do with the Fed.

But as long as we're on the topic of asset bubbles...you know what else causes them? Perverted incentives like the CRA, government mortgage guarantees, exempting one asset class (housing) from capital gains tax while leaving others asset classes subject to it.

 
At 11/05/2008 12:21 AM, Anonymous Anonymous said...

Machiavelli,

That's simply not true. Imagine a company that makes refrigerators. You make 1,000 refrigerators every year and you make $100 off of each fridge. You pay 10% taxes.

Now lets say taxes are cut to 5% and instead of 90 dollars per fridge you make 95. Well, thats great for you, but your market is still 1,000 refrigerators and you will still hire the same number of people.


Why does the demand for refrigerators remain the same? With more money to spend and save (invest), people may replace their fridges. Others may finally be able to afford to build a house which - you guessed it - needs a fridge. Even if the demand for a single product remains the same, new products come to market every day. If there is less money to invest because taxes are higher, then those products may never find funding.

Neither supply nor demand are constant.

 
At 11/05/2008 12:25 AM, Anonymous Anonymous said...

Now that would be fine if we had a solid financial system, but we don't. Our financial system focuses on short term gains, which is the natural things for institutions to do when there isn't a proper regulatory framework.

Explain.

It looks like you just slapped random snippets of sentences you read in different place together into an incoherent mess. I don't think you understand the financial system or the regulatory framework in which it operates.

 
At 11/05/2008 8:36 AM, Anonymous Anonymous said...

After the election results I was expecting a sad faced kitten on this blog. HA!

 
At 11/05/2008 9:06 AM, Anonymous Lars said...

Since I do not really understand economics at the level that brought us the "bailout" from the FED/Treasury, I hope you folks will help me understand what is happening.

Now that the election is over, we can expect higher taxes on the "rich" and gifts to the lower class. Can someone explain how trickle up economics works? How does "spread the wealth around" work? Sounds to me like we may go from what is now called a service economy to a government jobs program economy. Ultimately, money has to come from somewhere and if the "rich" either have less, or move out of the country and foreign countries stop buying our debt what value will the dollar have?

 
At 11/05/2008 9:28 AM, Anonymous qt said...

Lars,

For a person who doesn't know much about economics, you have asked some excellent questions.

"Spread the wealth around" seems to be more effective as a campaign slogan like "compassionate conservatism" than as an economic policy prescription. Can the U.S. afford to have 50% of the electorate pay no taxes without running the country into even greater deficits? I think not.

Given Obama's penchant for parsing and nuancing his policies, it will be interesting to see what policies will emerge. Divergences from his promises can still be blamed on Bush and the financial turmoil.

Perhaps, that's what Obama has counted on...being able to sell pie in the sky knowing that he will never have to deliver.

Change may not look like what we think. PTL

 
At 11/05/2008 9:53 AM, Blogger DB said...

I received the following in an email fwd. I thought it pretty accurately speaks to the current topic.- db

Suppose that every day, ten men go out for beer and the bill for allten comes to $100. If they paid their bill the way we pay our taxes,it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the
arrangement, until one day, the owner threw them a curve.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."Drinks for the ten now cost just$80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men? The real paying customers? How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33. But if they
subtracted that from everybody's share, then the fifth man and the
sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3(33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four
continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20,"declared the sixth man. He
pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a
dollar, too. It's unfair that he got ten times more than I!"
"That's true!!" shouted the seventh man. "Why should he get $10back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get
anything at all. The system exploits the poor!" The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how
our tax system works. The people who pay the highest taxes get the
most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat
friendlier.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible. Bottoms up!

 
At 11/05/2008 10:21 AM, Anonymous Anonymous said...

"In fact, they might start drinking overseas where the atmosphere is somewhat
friendlier."

But isn't that where all the evil terrorits in the world are and where all the babie eating ex-patriots dwell? that is what Fox News has been telling me for the last few years. Pen bombs, etc.

 
At 11/05/2008 10:40 AM, Anonymous Anonymous said...

Lars,

For a guy who claims to not understand economics, you sure seem to understand economics.

Can someone explain how trickle up economics works?

There's no such thing as "trickle down" economics. It was a derogatory term for Reagan's free market stance coined by George Bush during their bid for the Republican party nomination. So the idiotically named "trickle down" is actually the bottom up theory of free markets rather than the top down of central planning. The "trickle up" you're referring to is essentially a version of a command economy (command economy "lite") and I'll let you decide how well central planning works by assessing how well it did in the Soviet Union.

How does "spread the wealth around" work?

It works like this: You take my wealth and spread it around, creating a disincentive for me to create more of it. I hope you enjoyed my wealth. The well is dry and you can go back to being poorer.

Ultimately, money has to come from somewhere and if the "rich" either have less, or move out of the country and foreign countries stop buying our debt what value will the dollar have?

None. Enjoy your inflation and high unemployment, for that is what will be "spread around". The "rich" will invest less in wealth producing ventures (as opposed to tax shelters) with every hike in taxes. Since by "rich" the government means high earners, those people will work less with every increase in taxation. People in the highest income bracket tend to have high stress, high risk jobs or are business owners (uber high stress with uber high risk). Decreasing the return on their investment of both labour and capital by increasing taxes will provide incentives to reduce both investment and work in favour of enjoying more leisure time and reduced stress levels.

Somehow, I think you already understand all this, though.

 
At 11/05/2008 10:42 AM, Anonymous qt said...

"But isn't that where all the evil terrorits in the world are and where all the babie eating ex-patriots dwell? that is what Fox News has been telling me for the last few years. Pen bombs, etc."

That has to be one of the most pathetic comebacks I have ever read. If you can't refute the argument, why are you wasting your time and ours?

 
At 11/05/2008 10:45 AM, Anonymous Anonymous said...

That email fwrd was an argument? You fooled me. I thought it was an email forward.

If you don't like America then you can surely leave. I just don't think you have the marbles.

 
At 11/05/2008 11:14 AM, Blogger DB said...

This comment has been removed by the author.

 
At 11/05/2008 11:17 AM, Blogger like such as said...

"If you don't like America then you can surely leave. I just don't think you have the marbles."

The moral of the story is not that "rich people will leave the country" (though some undoubtedly will). The moral of the story is that, based on the new disincentives, the rich man who "got the most back" and got beaten up for it ended up staying home (ie not contributing to the pool), making everyone else worse off as well.

That "staying home" could be read as "leaving the country," but it could just as easily be read as "not taking risks in new investments because most of your gains will be stolen from you anyway," which i assure you, most do in fact have the marbles for.

 
At 11/05/2008 1:31 PM, Anonymous qt said...

like as such,

I have to agree. Most people don't leave the country but feel less incentive to work 12-16 hrs a day when marginal tax rates are increased.

Strangely, people who create jobs and pay their taxes don't appreciate being treated like enemies of the state by the parasitic Washington elite intent on tossing money around like it was water.

How does one respect a person like Joe Biden who gives less than 0.2% of his six-digit figure income to charity? Answer: One doesn't.

 
At 11/05/2008 3:55 PM, Anonymous Anonymous said...

qt

One does by voting him into office!

 
At 11/05/2008 5:19 PM, Anonymous qt said...

Anon.

Maybe you voted for Biden but the majority of the populace voted for a guy named Obama.

Reality Check: Biden received only 79,754 votes in the Democratic primaries (a mere 0.21%) vs. 17 million each for Obama and Hillary .

 
At 11/05/2008 6:24 PM, Blogger 1 said...

"The Poor are Poor because of the lack of jobs which pay a livable wage"...

What a load of libtard drivel...

The poor are poor because they have little worth as in job skills worth paying for...

"BUT, giving rich people tax breaks and hoping that they use that money to invest in new businesses also doesn't work because they just pocket that money into their savings"...

Are you channeling Krugman now Machiavelli999?

More nonsense... How many people did end up getting a job or hanging onto a job because of the cut in the capital gains taxes?

I know of one for sure, myself...

 
At 11/05/2008 6:28 PM, Anonymous Anonymous said...

The beer story is wrong. The first four men should not drink free. They should be paid to show up and drink.

 
At 11/05/2008 8:34 PM, Anonymous Craig said...

"BUT, giving rich people tax breaks and hoping that they use that money to invest in new businesses also doesn't work because they just pocket that money into their savings."

Um, just what do you think those savings do? Sit in a vault and gather dust? Perhaps they're lent at interest to other people starting new businesses! Just a thought.

 
At 11/06/2008 4:19 AM, Blogger OBloodyHell said...

> BUT, giving rich people tax breaks and hoping that they use that money to invest in new businesses also doesn't work because they just pocket that money into their savings.

Right, the EEEEVIL BASTARDS!!

They take that money and hide it in their mattresses, so that NO ONE can use it!!

I mean, how EEEEEVIL can you get!?!?

Clothead. Imbecile. Moron. "They put the money in savings". What happens to it then?

It gets invested by the BANK you nit.

In general, the ONLY way to make money WITH money, is to invest it. This creates jobs and opportunities for advancement for all, from middle-income to the poor.

Tell me, as one of The Marching Morons, how much do you march a day? I figure someone of your evident genius to do at least a full marathon...

 
At 11/06/2008 4:21 AM, Blogger OBloodyHell said...

> Yes, banks have definitely allocated capital very efficiently these past few years.

Indeed. We're only 9x richer than we were in 1980, instead of 12x!!!

Those incompetent halfwits!!

 
At 11/06/2008 4:32 AM, Blogger OBloodyHell said...

> After the election results I was expecting a sad faced kitten on this blog. HA!

Laugh while you can, Monkey Boy.

We'll see if you're laughing in 4 years with double-digit unemployment, rolling brownouts, your electric bill more than doubled, gas at $6 a gallon, and Russia, Venezuela, and Iran thumbing their noses at us and preying on anyone who wants to.

"The world" got what it wants. I don't think it's going to be at all pleasant for them.

We'll be having our own fun with lots of terrorist attacks all over the place at the same time.

Israel, it's much more a question of, "Do they nuke Iran before they get nukes, or after?" Iran is struggling to make their first weapon. They drop it on Tel Aviv, it's a sure thing that Israel's response will be... awesome. After all, Israel has almost certainly had nukes for more than three decades. Large portions of Iran will become radioactive glass.

If Iran is smarter, they'll bomb us. Obama will whine about "What did WEEEEE do to deserve this?" and do nothing, never figuring that the answer to that will have been "We were stupid enough to elect you, you moron."

We'll see how much you're smiling, then. I expect to see teeth.

 
At 11/28/2008 3:13 PM, Anonymous Anonymous said...

That was hilarious, OBloodyHell!

 

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