Inequality: Are the poor poor because the rich are rich?

CURE Policy Briefing | March 2020

At the Democratic Party presidential nominee debate in February 2020, Senator Bernie Sanders attacked former New York City mayor Michael Bloomberg for his wealth.

“Mike Bloomberg owns more wealth than the bottom 125 million Americans,” said Sanders.

“That’s wrong. That’s immoral.”

“And we cannot continue to see a situation where in the last three years, billionaires in this country saw an $850 billion increase in their wealth – congratulations Mr. Bloomberg – but the average American saw less than a 1% increase in his or her income. That’s wrong.”

Both Sanders and Elizabeth Warren have proposed taxes on wealth. Sanders and Former Vice President Biden support raising the tax rate on capital gains.

Is a gap in wealth and income in the nation “immoral” as Senator Sanders claims?

Does growing concentration of wealth in the top one percent of the nation imply that wealth is being taken from low- and middle-income Americans?

Is there some inherent problem when gaps in wealth and income exists and persist?

Morality of wealth and income gaps

According to the Merriam-Webster dictionary, morality means “conformity to ideals of right human conduct; virtue.”

For the notion of moral behavior to have any meaning, there must be some objective standard that defines right and wrong. Moral relativism denies that any such objective standard exists.

If in public discourse, we speak of morality as a guideline to public policy, then we must refer to some objective standard. If not, then morality as a consideration in public policy should be ignored.

If there is going to be a moral standard that we take as objective, that standard should be the Bible.

Although the percentage of Americans identifying as Christian has declined in recent years, it still represents a significant majority of the population. Per polling done by Pew Research Center in 2018/2019. 65 percent of Americans identify as Christian.

The founders of the country, those that signed our founding documents, were decidedly Christian and certainly were rooted in these values. The signers of the Declaration did so declaring, “with a firm reliance on Divine Providence, we mutually pledge to each other our lives, our fortunes, and our sacred honor.”

The preamble to the constitution defines among the purposes of the constitution to “secure the blessings of liberty.” The Oxford Dictionary defines blessing as “God’s favor and protection.”

It is entirely appropriate that the standard for defining right and wrong in America is the Bible.

The Tenth Commandment reads: “Thou shalt not covet thy neighbor’s house, thou shalt not covet thy neighbor’s wife, not his manservant, nor his maidservant, not his ox, nor his ass, nor anything that is thy neighbor’s.”

By the Biblically driven standard of morality, the immoral act is to scrutinize what others have and suggest that it is too much or too little relative to what others have. That is, the source of immorality is not what some have relative to what others have, but scrutiny of the differences with the motive of inspiring coveting.

Questions of morality also exist regard policies proposed as result of perceived differences in wealth and income.

The policies proposed by those who suggest wealth and income gaps are moral problems involve government actions to redistribute wealth.

The eighth commandment says “Thou shalt not steal.”

The prohibition against theft implies a regime of law defining ownership.

Citizens of a nation avail themselves to taxation to pay for public services. However, taxation, or any government confiscation with the objective to redistribute wealth that has been achieved in a legal fashion, is simply theft. Government actions of this nature are immoral as are suggestions by public officials and political candidates who advocate these ideas.

Are the poor poor because the rich are rich?

There are two basic questions regarding managing economic policy in the interest of all citizens.

The most fundamental question regarding economic policy is and should be maximizing growth.

The second consideration should be assuring that every citizen has maximum opportunity to participate in that growth.

Maximizing growth

Contrary to asserting that it is in the interests of low- and middle-income citizens to get the government more involved in economic management, it is the opposite. Less government meddling in the economic translates into more economic growth.

Per the graph below, done by John Cochrane, senior fellow at Stanford University’s Hoover Institution, shows direct correlation between per capita income and the World Bank’s Ease of Doing Business index. The Ease of Business Index is constructed based on seven governmental regulatory barriers to doing business.

The more free the economic environment for doing business, the more economic growth.

Per Cochrane, the U.S. economy grew in real terms from 1950 to 2000 at an annual rate of 3.5% per year. From 2000 to 2015 it grew at half that rate – 1.76 percent.

In 2008, the average American was three times better off than in 1950. From 1950 to 2000, per capita income grew from $16,000 to $49,000.

If growth from 1950 to 2000 had been 2% rather than 3.5%, income in 2008 would have been $23,000 rather than $49,000, Cochrane points out.

So if our objective is to maximize economic growth in the country, our objective should be to maximize economic freedom.

How do the poorest fare in the most economically free and fastest growing economies?

According to the Fraser Institute’s Economic Freedom of the World Index, the poorest fare far better in the most economically free economies:

Economic Freedom Quartile Average Income of poorest 10%

Most free economies (top 25%) $10,646

Second most free (next 25%) 3,819

Third most free (next 25%) 2,607

Least free (bottom 25%) 1,503

The World Bank defines extreme poverty as the percentage of a country living on $1.90/day. Moderate poverty is defined as the percentage of a country living on $3.20/day.

Extreme and Moderate poverty rates in countries that are the most economically have the lowest incidents of poverty:

Economic Freedom Quartile % Extreme Poverty % Moderate Poverty

Most free economies (top 25%) 1.82 5.10

Second most free (next 25%) 5.24 11.74

Third most free (next 25%) 13.79 22.31

Least free (bottom 25%) 27.22 43.27

It is clear that the poorest fare far better in countries that are the most economically free and have the fastest economic growth.

Maximizing participation in economic growth

We see that the way to maximize opportunity is to maximize economic growth.

Once policies are set that increase the likelihood of maximizing growth – that is, maximizing economic freedom – then focus should be directed to assure that every citizen maximizes their prospects for participating in the growth and prosperity of the nation.

This requires focus in two areas.

  1. Government policies that discourage the right behaviors for individuals to take responsibility for maximizing their opportunities.
  2. Moral behaviors that reduce likelihood of maximizing personal opportunity.

Dysfunctional government policy

Negative impact of government redistribution programs.

Former Senate Banking Committee Chairman Phil Gramm and former assistant commissioner of the Bureau of Labor Statistics have noted the negative impact of government redistribution programs. Each year, the federal government sponsors $1.9 trillion in transfer payments “from some 95 federal programs such as Medicare, Medicaid, and food stamps, which makes up more than 40% of federal spending…”

These transfer payments go disproportionately to those in bottom 2 quintiles of income – that is, the bottom 40 percent.

According to Gramm and Early, “In 1967, when funding for the war on poverty started to flow, almost 70% of prime-working age adults in bottom-quintile households were employed. Over the next 50 years, that share fell to 36%.”

Further investigation should be done into how redistribution programs discourage work and how they can be restructured – e.g., more rigorous work requirements –so that the nation may maintain programs that help in crises but do not hurt individuals in the long run.

Negative impact of government programs that discourage savings and wealth accumulation

CURE has long advocated reformed social security with a program of mandated personal retirement accounts. In such a program, individuals take ownership of the funds they are paying in payroll tax and invest those funds in an investment retirement account. Such a program would enable building of wealth far greater than is possible through social security that is also transferable between generations.

Maximizing participation in that economic growth depends on the behavior of individuals themselves and not on the behavior others. The poor are not poor because the rich are rich. The poor are poor because of behaviors that lead to poor economic outcomes

Negative impact of government controlled public schools

CURE advocates programs – such as vouchers and tax credits – that enable parental choice in education. Parents should be empowered to choose where their children will be educated.

Parental choice provokes competition in the education marketplace, producing a better product, as competition always does. Parental choice also gives parents vital control regarding the value-environment of the school where their child is educated. Thus, for instance, Christian parents should be empowered to send their children to be educated in Christian schools.

Education is vital for a child’s future and earning power. Thus, it is vital that all obstacles be removed from allowing every child to have the very best education possible, in a value environment that parents believe most appropriate and helpful to their child’s future.

Behavioral factors impacting future earnings

Ron Haskins, Senior Fellow at the Brookings Institution, has distilled three basic rules from his research that point to increasing likelihood that individuals will take advantage of the economic opportunities that a growing economy presents.

Per Haskins, these three rules are:

  1. Finish high school, at least
  2. Get a full-time job
  3. Wait until age 21 to get married and then have children

According to Haskins’ research, of those who follow these three rules, only 2% are in poverty and 75% have joined the middle class (defines as earning $55,000 per year, in 2013 dollars).

Is there something unfair regarding how the wealthiest achieve their wealth?

Steven N. Kaplan, University of Chicago Booth School of Business and Joshua D. Rauh, Sanford University Graduate School of Business, reported the make-up of the nation’s wealthiest, in “Family, Education, and Wealth Among the Richest Americans, 1982- 2012, in the America Economic Review, May 2013.

They report that from 1982 to 2011, the percentage of the Forbes 400 list of America’s wealthiest Americans that are self-made – created wealth through their own entrepreneurial initiative - increased from 40% in 1982 to 69% in 2011.

Catherine Clifford reports in Entrepreneur Magazine, April 29, 2013, “The Habits of Self-Made Billionaires” that on the Bloomberg list of the 100 wealthiest Americans in 2013, 73 are self-made and 27 have inherited wealth. Of the 100, 18 had no college degree. On the Forbes list of 400 wealthiest Americans, 20 percent grew up poor.

Is there evidence that higher wealth at the top means a transfer of wealth from the bottom?

Scott Winship, Senior Fellow at the Manhattan Institute, authored a study in 2014, “Inequality Does Not Reduce Prosperity: A compilation of evidence across countries”

The conclusion of the study is as follows:

“…when changes in income concentration and living standards are considered across countries…larger increases in inequality correspond with sharper increases in living standards for the middle class and poor alike.”

“In developed nations, greater inequality tends to accompany stronger economic growth. This stronger growth may explain how it is when the top gets a bigger share of the economic pie, the amount of pie received by the middle class and the poor is nevertheless greater than it otherwise would have been. Greater inequality can increase the size of the pie.”

Conclusions

  1. Contrary to claims that gaps in wealth and income are immoral, it is inspiration of envy and coveting that is immoral, as are government policies that confiscate and redistribute honestly earned wealth for purposes of redistribution of that wealth.
  2. Economic opportunity is maximized by maximizing economic growth, which is achieved by maximizing economic freedom.
  3. Evidence points to faster economic growth being accompanied by more inequality. However, that inequality is the result of the freedom of the most capable and creative to create. The result of this freedom permits growing the overall economic pie larger, meaning that all benefit relatively. Although the result is inequality, the middle class and the poor wind up better off than they would if growth was slower and inequality less.
  4. Public policy should not be focused on inequality. Public policy should be focused on assuring conditions that allow every citizen to maximize their individual potential and ability to participate to the greatest extent possible in the economic growth and opportunity that is being created.
  5. Government policies that discourage work, that interfere with savings and investment, and discourage providing the best education opportunities for children should be reformed.
  6. Inciting and inspiring envy and coveting is not just in principle immoral but creates the opposite conditions necessary for individuals to advance their personal situation. It provokes individuals to look at others rather than at themselves as the answer to improving their personal situation. Just as using an objective Biblical standard for morality rejects inequality as a point of focus for public policy, those same Biblical standards provide the answer for individuals to improve their lot. Research supports that marriage, family, and having children only in the framework of family improves personal economic outcomes.

For more information, visit urbancure.org or email policy@urbancure.org