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Wealth Inequality Is the Greatest Enemy of Poverty

April 8, 2019

People become rich by mass producing former luxuries, raising the living standards of all

The late Jimmy Breslin liked to bring his readers very close to major news stories, and did just that during the Crown Heights, Brooklyn riots of 1991. The three days of tumult and violence took place in the aftermath of a tragic car crash in which a car driven by an Orthodox Jewish driver struck and killed a seven-year-old black child while seriously injuring his cousin.

Breslin, being Breslin, took a cab right into the middle of the rioting. His subsequent column referenced the impoverishment of the black Crown Heights residents who surrounded the car he was in, and how they desperately needed “money.”

“Money” is placed in quotes simply because Breslin missed the point. No one wants “money” as much as they want what money can be exchanged for. Money can’t be eaten— rather, credible money can be exchanged for goods and services. What Breslin really meant is that Crown Heights citizens desired goods and services not commensurate with the dollars in their pockets.

Wealth-Creation 101

Washington Post columnist Catherine Rampell thinks Sen. Elizabeth Warren’s (D-MA) wealth-tax plan is a fine idea, and that it “could correct past mistakes.” That Rampell is unwittingly arguing with herself in her desire to penalize the rich will soon become apparent, but for now it’s worth addressing a few basic falsehoods promoted by an economics columnist who lacks a feel for her specialty.

Rampell asserts that “Over several decades, U.S. policies have facilitated a systemic upward redistribution of wealth.” No, that’s so untrue. Wealth is a function of investment, and the capital gains tax that penalizes investment has risen from 15 percent earlier in the 21st century to 23.8 percent when we factor in the Affordable Care Act surcharge.

No doubt the capital gains tax is lower than what prevailed in the slow-growth 1970s, but it’s hardly been declining as much as Rampell's column suggests. To be fair, the capital gains tax should be zero. There are quite simply no companies and no jobs without investment first, so in a reasonably sane world no one would be charged for putting wealth to work.

While Rampell is incorrect about the direction of policy, she also misses the why behind the wealth surge. The latter is plainly an effect of technological advances that Rampell would likely be very frustrated if forced to live without. Simply stated, the internet and other leaps that have figuratively shrunk the world have made it possible for geniuses like Jeff Bezos to meet the needs of exponentially more people around the world.

Product of Brilliant Minds

Thanks to the internet, wealth wasn’t “redistributed upward” as much as it was created by brilliant minds touching more and more of the world with their unparalleled ability to serve. Assuming Rampell really wants to shrink a rising wealth gap, a gap that plainly signals a massive reduction in the lifestyle gap between the rich and poor, her columns would be most effective if she made them about abolishing the internet.

Unaware of what she's actually proposing, Rampell naively aims to put a halo around her own head in her calls to neuter the rich. Implicit in her desire to harm a whole class of people is that in pushing down those with means, she’d like to lift those without.

In calling for a forced transfer of money from the haves to the have nots, Rampell is less artfully committing the same error that Breslin did nearly 30 years ago: she presumes that “money” is what the poor need. No, the poor need what money can be exchanged for— the more the better.

From Luxury to Commonplace

Crucial here is that the rich become rich precisely because they mass-produce former luxuries. In their failure to understand this truth, this is where Rampell and the wealth redistribution crowd shrink to arguing with themselves.

While expressing a desire to essentially geld those who’ve created wealth, they’re unwittingly seeking to penalize those who’ve gotten rich through their transformation of scarce goods enjoyed by the few into common goods enjoyed by everyone.

In 1991, a computer that we'd all arrogantly turn our noses up at today cost $10,000, the most primitive of mobile phones retailed in the thousands such that they could generally only be found in Beverly Hills, Manhattan, or the Hamptons, and a simple 30 minute phone call (on a landline no less) from Baltimore to Washington, D.C. set the common man back $10 to $20. Rampell believes the poor want “money,” but like us all, they want things. The rich get rich by virtue of democratizing access to “things.”

Raising All Boats

Today’s newly rich required investment to vivify in the literal sense their desire to democratize access to what solely the rich used to enjoy. This is where inheritors of wealth come in. Unless they’re stuffing the wealth passed on to them under mattresses, they’re investing it.

Get it? For Rampell to cheer wealth taxes is for her to cheer the shrinking of the capital that’s necessary for entrepreneurs to turn ideas into real living-standard advances.

Rampell wants the poor to have more money, but money’s only useful insofar as it’s exchangeable for the goods and services that we all really want. The rich get rich by virtue of making what's dear rather cheap, thus helping the poor the most. Inequality is poverty’s greatest enemy. Rampell seeks to neuter the unequal. She’s arguing with herself.

John Tamny (jtamny@realclearmarkets.com) is editor of RealClearMarkets and a policy advisor to The Heartland Institute. This article was originally published at RealClearMarkets and is reprinted with permission.

Author
John Tamny is the political economy editor at Forbes, a senior economic advisor to Toreador Research & Trading, and editor of RealClearMarkets.com (RCM). He is also a policy advisor to The Heartland Institute.
jtamny@realclearmarkets.com @johntamny