For Richer, For Poorer
Memo to the new administration: When you hurt the wealthy, you hurt the poor and middle class, too.
Last week the Obama administration stepped up its anti-rich stance with a move in place to limit executive compensation on Wall Street. Implicit here is the view that Wall Street’s health is inimical to the fortunes of those on Main Street. This is nice political theater for sure, but it would be more realistic to say that Wall Street and Main Street are joined at the hip. The fortunes of the rich, middle class, and poor are similarly tied together.
When politicians attack the rich, they more realistically put a bull’s eye on the wages of the poor and middle class. Simply put, without capital there are no wages.
Indeed, as countless news accounts over the last several months have shown, when the rich hurt, it is those with less money who feel their pain most acutely. This has shown up everywhere from the amount the rich offer in tips at restaurants, to charities meant to aid the sick and indolent, to universities reliant on donors who fund new buildings, professorships, and financial aid.
Where charity is concerned alone, all it takes to see how this works is to look at any number of glossy magazines published in order to chronicle the doings of the wealthy. It’s almost a rite of passage among many of the newly rich to join the charity circuit in order to “give back” some of their gains. To use a word in the title of a magazine about the rich, vanity drives all manner of charitable giving. But when there are no gains, there’s less in the way of charity for the poor and middle class.
And as much as it’s popular among certain “snarky” mainstream-media members to mock the glitzy parties, chauffeur-driven cars, planes, and yachts of the super-rich as symbols of wretched excess, in each instance this supposed excess leads to the transfer of wealth from the flush among us to those simply trying to get by. So while conspicuous consumption is overrated as an economic stimulant, it can’t be denied that when the wealthy spend, their money often finds its way into the pockets of those not wealthy.
Most important of all, by virtue of being rich, those with money have capital. And if capital is not being made available by the wealthy, there’s no way for the poor and middle class to borrow the funds necessary to start the very businesses that will possibly make them rich. So when politicians tell us that they intend to raise the rate of taxation on the highest earners, the true translation here is that they’ll take money from the wealthy that, if untaxed, would likely fund the rise of job-creating companies properly supported with cash used to hire those not yet rich.
When politicians attack the rich, they more realistically put a bull’s eye on the wages of the poor and middle class. Simply put, without capital there are no wages. It is the rich who possess capital, so taxing them heavily is hardly something that aids those who want to someday grow rich themselves.
And when we consider companies started by poor and middle-class members of society, often thanks to funds offered by the rich, these companies can only grow big if they satisfy some previously unmet market need. Contrary to the Hollywood-driven view suggesting that businessmen are evil, truly successful business owners are those who struggle mightily to generate profits by virtue of giving us something that we want, but that previously was out of our reach.
In short, business concepts can usually only enrich their investors and proprietors if the concepts pursued are made available to the broad swath of society that is presently not rich. As Joseph Schumpeter once wrote, “the capitalist engine is first and last an engine of mass (my emphasis) production which unavoidably means production for the masses.” Think Henry Ford’s innovations with the automobile, Michael Dell’s mass-marketing of the personal computer, and the proliferation of cellphones perhaps originally made famous by plutocrat Gordon Gekko in Oliver Stone’s Wall Street.
Simplified, just as the poor suffer when the rich do, so too do the rich suffer when the poor are hurting. It’s surely enticing at times to think that the wealthy in our midst have it in for those not in the Club, but the greater reality is that if the poor and middle class lack disposable income, there’s no market for the rich and those who aspire to same to hawk their wares to. In the end, all three economic classes are in the same boat, and when one group is hurting, the pain is diffuse.
So to the extent that policymakers seek to advantage the poor relative to the rich, and vice versa, the greater truth is that in order to stimulate one economic class, it’s essential to depress another. Better it would be if politicians sought to remove barriers to economic activity generally so that all can benefit.
Schumpeter once observed that “the upper strata of society are like hotels which indeed are always full of people, but people who are forever changing.” Exactly, and to one-up the Prophet of Innovation, economic society is like a hotel with three floors; one each for the poor, middle class, and wealthy. And if one floor is lacking customers, the whole hotel suffers.
John Tamny is editor of RealClearMarkets, a senior economist with HC Wainwright Economics, and a senior economic adviser to Toreador Research and Trading.