Monthly Archives: January 2014

Why the Rich are Getting Richer and the Poor ain’t.

On frequent occasion I will get into discussions with persons of diverse demographic backgrounds.  Some are poor, some considered wealthy, though most of them would likely be considered middle class.  As humans, we like to talk about money and wealthy people.  When speaking of somebody that lives in a large, expensive home, almost inevitably I hear comments alluding to the excessiveness of the the home and how it’s a big waste of money.  When I hear them say that, I ask them if they had millions and millions, what they would spend it on?   Either they don’t know because they haven’t thought about it or they sheepishly try and explain how they would donate to charities (generally mumbled), when in reality the sheepishness they experience arises out of the realization that if they were in the same situation, they would likely be buying a similar house.  They realize that what we consider “excessive” is more relative to our current state of wealth, than it is to some objective measuring stick.

As a society, many of us tend to villainize the wealthy as the root of all our social evils and woes.  While there are definitely some higher profile characters that deserve the spot in hell reserved for them, in general the perspective is unjustified and more generally, flat out wrong.

President Obama panders to the poor and middle class communities by trying to convince them they are poorer, because the rich are richer.   In all of us, at various levels we have an innate jealousy that arises when we see that the Jones’s are somehow beating us in the rat or other proverbial races.  As a result we want a scapegoat as an excuse for our failure to succeed as much as Mr. & Mrs. Jones.  So when a political candidate or news reporter hand us that scapegoat, most of us ravenously eat it up, assimilating it as our own opinion, rather than considering the idea that I may be poor because I’ve not chosen to be otherwise.

The truth is, only when the rich get richer, do the poor and middle class get richer.  If the rich begin to lose money, the poor and middle class begin to lose their jobs.  There are exceptions to this rule of course.  The majority of wealthy professional athletes, actors, musicians and lottery winners end up in bankruptcy or insolvency within a relatively short period of time after their job or winning ends.  I should also point out that their being rich results in relatively few new jobs for the economy.  Compare that to the successful business person who has built a venture into a good sized company.  This person has learned the value of money, the methods in which to earn it, make it grow and how to avoid losing it once it is earned.   As their business grows, so do the number of jobs it provides.  When the number of basic jobs grow, the number of higher paid jobs grow as well to supervise the entry level jobs.  The more specialized the skills for the job, the higher the pay will be.  In addition, all businesses need support from other businesses to grow.  As a result, if one business begins to grow, then it will need additional services from other businesses, providing further opportunity for a whole chain of other businesses to grow.  As businesses grow, the owners of said businesses become wealthier, sometimes significantly so.  Yet, the number of jobs has gone up and so has the average pay of the poor and middle class.

Many people refer to this concept as “trickle down economics”, the term being made famous during the Reagan administration.  However, it was actually Calvin Coolidge, with the guidance of his secretary of the Treasury, Andrew Mellon that came up with the concept which they coined as “Scientific Taxation”.  The theory was that if you lowered the tax rate on the wealthy, overall revenue would increase due to the wealthy reinvesting their funds back into business and the economy, which in turn increased GDP, providing a larger tax base to tax.  Coolidge and Mellon got it passed and it worked perfectly.  They had dropped the top tax rate from over 40% to 25% on the wealthiest persons.  The wealthy became wealthier, but magically the tax revenue surplus increased over $100 Million the next year (which was a lot back then) with substantial growth in the economy.  The unemployment rate  also decreased by about 2/3 from around 5 million unemployed to under 2 million.  The rich were getting richer and the poor and the middle class had jobs, providing them an opportunity to begin accumulating wealth.

Some of the unintended consequences of the massive business growth is that it brought with it a lot of unmerited speculation in future growth.  Coolidge saw this happening and tried to set in place policies that would encourage saving and moderation in speculation in the stock market.  The Congress and Senate only saw the dollar signs from the additional tax revenues and due to their failure to act, or in some cases, stop acting, followed with a President Hoover who spent money like it was going out of style, created a void that caused the great depression.

What we should have learned however is that, lower taxes on the wealthy really benefits the poor and middle class and in turn, the country.  However, to avoid the ensuing overly aggressive speculation on growth, perhaps reducing tax rates should be done a little slower rate than 15% per year.

Part of what engineered the phenomenal growth rate on real estate in recent years was the interest rates being too low, which in turn increased values, then over speculation happened leading to our most recent recession.  Obviously there are a lot of gears churning that impact the economy, but these are some of the most obvious.  Ironically, most of the starting points of the recessions and depressions are caused by the government trying to help special interest groups or demographic groups such as the poor and middle class, in the name of “equal housing”, “veteran bonuses”, “crop price fixing”, etc.  The lesson we seem to be missing is that when you attack the business owner, you end up hurting everybody.   Government is hesitant to really allow capitalism to work as it’s supposed to, because it reduces the power of the government.  In capitalism there will always be winners and losers.  The government would like to believe they can prevent anybody from being the loser.  But the key promise of capitalism isn’t about not being a loser, it’s that capitalism provides us the opportunity to play the game, over and over and over again until we win.  Every successful entrepreneur can tell you stories about how they lost, usually multiple times until they won.

There has been a lot of news articles over the last year talking about how the divide between the poor and the wealthy is growing.  As my redneck friends would say it: “No duh”.  It doesn’t take rocket science to figure out that if you have a poor man with an extra $1000 and a rich man with $1 Million, when invested at 10% in one year, the rich man will have made $100,000, while the poor man only made $100.  The divide just increased by $99,900 and apparently the rich man is now evil because he was smart with how he invested his money.  The sad reality of it is that the poor man likely never invested the extra $1000.  More likely it was spent and now the divide is $1,100,000, not because the rich man did anything wrong, but because the poor man didn’t do enough right.

We really need to stop villainizing the rich business person.  If our ambition is to be wealthy, the only way we will ever reach it, is to throw all the excuses, all the scapegoats out the window and admit that any failure to achieve success is all on our own shoulders.  I believe that education is the key to leaving the poor house.  Not education that is forced upon someone like k-12, but the education that we pursue for ourselves because we’re hungry to learn.  That kind of education is powerful.   Self-education is the true divide between the poor and the rich and money has nothing to do with it.

If we are poor, we have but two choices.  To be or not to be.

Your destiny is what you make it to be, so you might as well make it an incredible one.

 

Author: Mark Bitton

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