“Capitalism did not create poverty—it inherited it,” observed individualist philosopher Ayn Rand.
Over the past centuries, capitalism has eradicated the previous conditions of widespread famine and starvation and has elevated the living standards of the poor to a level previously unheard of, even for kings. Today, even low-income Americans commonly enjoy cell phones, automobiles, a clean living environment, modern medicine and access to the world’s collected knowledge through the internet.
Despite this evidence of capitalist progress, however, President Obama warns of “a dangerous and growing inequality…[that is]…the defining challenge of our time.”Senate Majority Leader Harry Reid adds, “There is no greater challenge this country has faced than income inequality. And we must do something about it.”
Obama, Democrat leaders and some Republicans, including Nevada Sen. Dean Heller, have called for government to smooth out this “inequality” by extending unemployment benefits while so-called “progressives” are simultaneously pushing to raise the national minimum wage.
It’s probable that this new rhetorical focus by leading Democrats is simply meant to distract attention from the many failures attending ObamaCare. Nevertheless, it suffers from at least as many problems.
The new agenda promotes an idea that society’s most successful individuals achieve that success only at the expense of those whose achievements are more modest, and that this produces a growing gap between the rich and the nominally poor.
This gap, we are implicitly told, would shrink if only our oh-so-benevolent politicians enact rigid price controls on labor, send bureaucrats to meddle with the decisions of small business owners and send workers more checks for not working.
This is literally the plan.
Yet, the central message behind the new agenda — that capitalism somehow favors only a handful of people — is demonstrably false.
Consider data from the nonpartisan Congressional Budget Office, which shows that, between 1979 and 2009, households in the bottom income quintile still saw after-tax income growth of 44.8 percent. Middle-class households saw growth of35.8 percent over the same period, while those in the top quintile saw after-tax income grow 72.8 percent. Those figures mean that living standards have increased for everyone, even if at slightly different rates.
Even these objective figures, however, mask the ongoing movement of households from one income quintile to the next. Very rarely does an individual remain in the same income group throughout life. As he or she gains new skills and experience, his or her earning ability also increases.
The Census Bureau estimates that within just three years, 38 percent of those in the bottom income quintile climb to a different quintile. Over the same three years, one-third of those in the top quintile fall to a lower quintile as new up-and-comers push them out. And, more than half of households in the middle three income quintiles move to a different quintile within three years. The Treasury Department confirms this high degree of income mobility: More than half of taxpayers moved to a different income quintile between 1996 and 2005.The same holds true for the decade between 1986 and 1995.
The fact is, statistics that only look at the difference in earning growth between the various income groups obscure the individualistic nature of capitalism and create the impression that we all belong to defined income classes that are in constant conflict.
If, then, one’s position on the income scale isn’t determined by one’s position in previous years, what are the determining factors?
Primarily, it’s the decision to work.
David Henderson at the National Center for Policy Analysis analyzed 2006 Census data and found that 81.4 percent of households in the top income quintile had two or more people working, while only 2.2 percent of those households had no one working.
For households in the bottom quintile, however, it was quite different: Only 12.6 percent had two or more people working, while in 39.2 percent of the households, nobody was working.
So, if working is the key to income growth, then how do Sen. Heller and Democrat leaders argue that extending unemployment benefits will help the economy?
For nations as well as individuals, wealth results from production. It cannot be generated by paying workers not to work.
As with most government transfer schemes, unemployment insurance undermines the relative value of working or even seeking employment. The OECD Employment Outlook concludes, “It is well established that generous unemployment benefits can increase the duration of unemployment spells and the overall level of unemployment.”Notwithstanding Keynesian pleaders like Mark Zandi the best economic “stimulus” would be curtailing the current disincentive to seek gainful employment.
The Left’s narrative on the minimum wage is even more off the mark. A legal wage floor increases the difficulty of finding entry-level employment. And for young, unskilled workers, entry-level jobs at OfficeMax or Home Depot are important routes to experience and moving up the income ladder. When employers are required to pay entry-level workers more than economically justified, however, those jobs tend to disappear.
That’s why economists Richard Burkhauser and Joseph Sabia found “no evidence that minimum wage increases…lowered state poverty rates” when they examined 28 states that increased minimum wages between 2003 and 2007.
They also determined that, had the federal minimum wage been increased to $9.50 per hour as President Obama once proposed, only 11.3 percent of those lucky enough to find a job would live in households officially defined as poor. Most — 63.2 percent — would be the second or third income-earners in households that already earn twice the poverty level or more.
And that, after all, appears to be what the new agenda is all about—a short-sighted effort to exploit general economic illiteracy for electoral advantage.