WASHINGTON – On the left, the conventional wisdom is that too many people are poor in America because a very small minority, (the 1%), gamed the system, this way siphoning off most of the wealth available.
Tax the rich
This being the case, it is only fair to rebalance the accounts by taxing the rich –and the super rich in particular– while distributing all this ill gotten money to the poor. This way a government inspired by a sense of “justice” will redress the injustices created by a rigged economic system.
The poor do not have a chance
This would make sense if it were indeed true that many are poor because they are deprived of the fruits of their labor. But the evidence shows a different picture, as we get from an insightful WSJ op-ed piece, (What the “Inequality” Warriors Really Want, November 20, 2014), by John H. Cochrane, Professor of Finance at the University of Chicago Booth School of Business.
Most wealth is legitimate
The truth is that American billionaires are mostly self-made, argues Cochrane. These are people who came up with significant innovations and managed to commercialize them. Down the scale, some people are much better off than others because they have studied. They have learned valuable skills that gave them highly rewarded jobs. None of these individuals “gamed the system”.
Of course there are people running or employed by “protected sectors”. Because of politics and/or successful lobbying, many sectors receive unfair economic advantages, this way collecting an additional “rent” that goes beyond the fair market value of whatever they provide in terms of goods or services.
Some sectors enjoy special tax treatment, protection from foreign or domestic competitors and/or preferential treatment in public procurements bids. Due to favorable regulations, others may be able to restrict access to their professions, this way being able to raise their fees, without any fear that new competitors will offer the same services at lower prices.
All this does exist in America, and it is bad. This is not how free market capitalism should work. This is crony capitalism, and it has nothing to do with free enterprise within a rules based system that should create a competitive but fair economy.
That said, the fact that some sectors enjoy artificial economic advantages does not explain why the poor are poor.
The roots of poverty
And here is what Cochrane says, in his op-ed WSJ piece:
“A big reason [for poverty]: awful public schools dominated by teachers unions, which leave kids unprepared even to enter college…Americans stuck in a cycle of terrible early-child experiences, substance abuse, broken families, unemployment and criminality represent a different source of inequality. Their problems have proven immune to floods of government money. And government programs and drug laws are arguably part of the problem. These problems, and many like them, have nothing to do with a rise in top 1% incomes and wealth”.
All of this tells us that it is wrong to believe that income inequality is the outcome of an unfair system. No doubt there is some unfairness and it should be dealt with. In some part of our economy the system is indeed rigged. The outcome is crony capitalism.
But getting rid of crony capitalism –something that we should do anyway– will not transform the conditions of the poor trapped in a self-perpetuating cycle of poverty that has cultural and psychological roots. Crony capitalism alone does not explain why most public schools are mediocre to bad. The power of teachers unions in inhibiting reforms provides a better reason.
Opportunity is the answer
In the final analysis, as Cochrane also says, our focus should not be on why a few people get to be so rich. Our focus should be in creating an environment in which anybody in America will have real access to real opportunity.
And, in my judgement, no tool is more powerful than a good education.