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Posts Tagged ‘Poverty’

We know the welfare state is good news for people inside government. Lots of bureaucrats are required, after all, to oversee a plethora of redistribution programs.

Walter Williams refers to these paper pushers as poverty pimps, and there’s even a ranking showing which states have the greatest number of these folks who profit by creating dependency.

But does anybody else benefit from welfare programs?

Robert Rector of the Heritage Foundation explains in the Washington Times that the War on Poverty certainly hasn’t been a success for taxpayers or poor people. Instead, it’s created a costly web of dependency.

This year marks the 50th anniversary of President Lyndon Johnson’s launch of the War on Poverty. …Since then, the taxpayers have spent $22 trillion on Johnson’s war. Adjusted for inflation, that’s three times the cost of all military wars since the American Revolution. Last year, government spent $943 billion providing cash, food, housing and medical care to poor and low-income Americans. …More than 100 million people, or one third of Americans, received some type of welfare aid, at an average cost of $9,000 per recipient.

Here are some of the unpleasant details.

The U.S. Census Bureau has just released its annual poverty report. The report claims that in 2013, 14.5 percent of Americans were poor. Remarkably, that’s almost the same poverty rate as in 1967, three years after the War on Poverty started. How can that be? …When Johnson launched the War on Poverty, he wanted to give the poor a “hand up, not a hand out.” He stated that his war would shrink welfare rolls and turn the poor from “tax-eaters” into “taxpayers.” Johnson’s aim was to make poor families self-sufficient — able to rise above poverty through their own earnings without dependence on welfare. The exact opposite happened. For a decade-and-a-half before the War on Poverty began, self-sufficiency in America improved dramatically. For the past 45 years, though, there has been no improvement at all.

The final two sentences of that excerpt are the most important words in Robert’s column.

We were making lots of progress in the fight against poverty in the 1950s. That’s because we relied on the private economy and self sufficiency, as seen on the right side of this Chuck Asay cartoon..

But once politicians decided government was responsible for fighting poverty, progress ceased.

Why did progress stop? Because, as Robert explains, the welfare state creates a dependency trap and enables self-destructive behavior.

The culprit is, in part, the welfare system itself, which discourages work and penalizes marriage. …The welfare state is self-perpetuating. By undermining the social norms necessary for self-reliance, welfare creates a need for even greater assistance in the future. President Obama plans to spend $13 trillion over the next decade on welfare programs that will discourage work, penalize marriage and undermine self-sufficiency.

By the way, being “poor” in America rarely means material deprivation.

Most Americans who live in “poverty” have much higher living standards that people elsewhere in the world.

The actual living conditions of households labeled as poor by Census are surprising to most people. According to the government’s own surveys, 80 percent of poor households have air conditioning; nearly two-thirds have cable or satellite television; half have a personal computer; 40 percent have a wide-screen HDTV. Three-quarters own a car or truck; nearly a third has two or more vehicles. Ninety-six percent of poor parents state that their children were never hungry at any time during the year because they could not afford food. …As a group, poor children are far from being chronically undernourished. The average consumption of protein, vitamins and minerals is virtually the same for poor and middle-class children, and in most cases is well above recommended norms. …the average poor American has more living space than the typical nonpoor individual living in Sweden, France, Germany or the United Kingdom.

By the way, don’t be surprised by the final sentence in that excerpt. Most people have no idea that Americans have far higher living standards than their cousins in Europe.

For more information on how best to help the poor, watch this video from the Center for Freedom and Prosperity.

Bono actually agrees that capitalism is the best approach to fighting poverty. Too bad the Pope lacks the same insight.

P.S. Here’s a map showing which states have the biggest welfare benefits.

P.P.S. If you want to see an utterly dishonest approach to public policy, read how the OECD tried to exaggerate poverty in the United States, so much so that it even tried to imply that there was more poverty in America than Greece.

P.P.P.S. Thomas Sowell has wise thoughts on how the welfare state hurts the less fortunate.

P.P.P.P.S. Some libertarians have suggested a “basic income” to replace the dozens of inefficient and failed welfare programs in Washington. For what it’s worth, I think there’s a better alternative.

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I haven’t spent much time writing about Thomas Piketty’s inequality book for the simple reason that my goal is economic liberty, not equality.

That being said, I think that Piketty is fundamentally misguided even if the goal is helping the poor. Simply stated, long-run growth is the best way of reducing poverty and boosting living standards. Piketty, by contrast, focuses on redistribution – even though this would require punitive taxation, thus undermining growth and hurting the less fortunate.

This is very obvious when we look at economic performance in market-oriented nations and compare it to economic performance in countries where government plays a bigger role.

Most recently, I showed how Poland is out-pacing Ukraine.

I’ve compared South Korea and North Korea.

The data for Chile, Argentina, and Venezuela is very powerful.

I’ve shown how Singapore has eclipsed Jamaica.

And we can see that Hong Kong has caught up with the United States.

As I often remark in my speeches, I’d much rather be a poor person in a jurisdiction such as Hong Kong or Singapore rather than in a “compassionate” country such as France.

France might give me lots of handouts, but I’d remain poor. In a free-market society, by contrast, I could climb out of poverty.

Anyhow, let’s return to Piketty’s thesis about the rich benefiting from capital accumulation. All sorts of scholars have called into question his theoretical model and his empirical data, but I don’t even care if Piketty’s right. In a free society, the worst thing that happens is that the rich get richer faster than the poor get richer.

That’s why we should concentrate on what we can do to boost growth.

And there is one economic reform that is good for growth, but would be especially beneficial for lower-income people. Merrill Matthews of the Institute for Policy Innovation, in a column for Forbes, makes a powerful case for Social Security reform.

He starts with the essential insight that policy makers should focus on helping the poor, not penalizing success.

French economist Thomas Piketty wants to attack the issue of income inequality by redistributing the wealth of the highest earners. Wouldn’t a better solution be to increase the wealth of the lowest earners?

Merrill says we should make it easier for the overall population to become capitalists.

…instead of taxing that success even more than we already do, which discourages capital development and investment, Washington can help lower- and middle-income workers acquire capital so they too can partake in those higher returns.

He then points out that workers are forced to participate in a Social Security system that imposes very high taxes in exchange for rather meager benefits.

Eugene Steuerle and Caleb Quakenbush of the Urban Institute publish an annual estimate of how much workers at different income levels and marriage status pay into Social Security and Medicare and how much they can expect to receive in benefits. Their 2013 report estimates that a single male worker earning the average income of $44,800 (in 2013 dollars) turning 65 in 2015 can expect to receive $287,000 in Social Security benefits. However, that worker paid in $337,000, for a net loss of about $50,000. Both estimates assume a growth rate of 2 percent, which happens to match Piketty’s projection of long-term GDP growth. That disparity between contributions and benefits declines significantly for women, who tend to live longer. A single female worker would have paid in the same amount, $337,000, but could expect to receive $314,000.

Now we get to his proposed reform.

…what if workers were able to put that same amount of money—their 12.4 percent Social Security (FICA) tax; $5,555 in Stererle’s example—into a personal retirement account that could be invested in broad-based equities?

With personal retirement accounts, ordinary workers can generate big nest eggs.

Using an interest calculator, a $5,555 annual contribution over 40 years at 6 percent grows to about $970,000. Factor in that wealth and income inequality largely evaporates. …if the left is really concerned about income inequality, the best way to end it is wealth creation, not redistribution. Replacing Social Security’s financially struggling system with personal retirement accounts would create real wealth for millions of working Americans.

As you can imagine, I heartily concur. Here’s the video I narrated on the topic for the Center for Freedom and Prosperity.

By the way, if you think the stock market is too risky, particularly after the recent financial crisis, one of my Cato colleagues produced a thorough study showing that people who retired right after the market fell still would have been better off with personal accounts.

P.S. If you want to understand why class-warfare tax policy will backfire, another one of my colleagues dismantled the work of Piketty and others.

P.P.S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke, though I’m not sure we should laugh considering that tens of millions of Americans will suffer when the system no longer can afford to pay promised benefits.

P.P.P.S. Obama’s supposed solution would be an even bigger move in the wrong direction.

P.P.P.P.S. Last but definitely not least, watch Margaret Thatcher destroy the left’s position on income distribution.

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I’m frequently baffled at the stupidity of Republicans.

When they took control of Congress back in 1994, for instance, they had unrestricted ability to get rid of the bureaucrats that generated bad economic analysis at both the Joint Committee on Taxation and the Congressional Budget Office.

Yet notwithstanding more than a decade of congressional power, GOPers did almost nothing to neutralize the bureaucrats who produced shoddy research that helped the left push for more spending and higher taxes.

Sort of like a football team allowing the opposing coach to pick the refs and design game plans for both teams.

Another painful example is that Republicans never used their majority status to defund the Paris-based Organization for Economic Cooperation and Development.

This international bureaucracy is infamous for pushing policies to expand the power of government. That’s not too surprising since it’s dominated by European welfare states. But it is amazing that Republicans seem to think it’s perfectly fine to send about $100 million each year to subsidize the OECD’s agenda.

Particularly when the OECD so often pushes policies that are directly contrary to American interests.

It has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes in the United States.

The bureaucrats are advocating higher business tax burdens, which would aggravate America’s competitive disadvantage.

The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.

It supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”

The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.

It even concocts dishonest poverty numbers to advocate more redistribution in the United States.

Let’s elaborate on the last item dealing with poverty in the United States. According to the OECD, poverty is more sever in the United States than it is in relatively poor nations such as Greece, Portugal, and Hungary.

Indeed, the bureaucrats in Paris even put together a chart showing how “bad” America ranks in this category.

But it’s all bunk. Utterly dishonest garbage. Here’s some of what I wrote last year on this topic.

…if you read the fine print, you may notice one itsy-bitsy detail. The chart isn’t a measure of poverty. Not even close. Indeed, the chart wouldn’t change if all of the people of any nation (or all nations) suddenly had 10 times as much income. That’s because the OECD is measuring is relative income distribution rather than relative poverty. And the left likes this measure because coerced redistribution automatically leads to the appearance of less poverty. Even if everybody’s income is lower!

But the OECD isn’t letting up. In a new “Society at a Glance” look at the United States last month, here’s what the OECD claimed.

The relative poverty rate in the U.S. is 17.4%, compared to an OECD average of 11.1%. Only Chile, Israel, Mexico and Turkey have higher poverty rates than the U.S.

But unlike in other publications, the OECD didn’t bother to include any fine print admitting that its poverty measure has nothing to do with poverty.

That’s grotesquely dishonest and morally corrupt.

And since we’re on the topic of corruption, let’s broaden our discussion. National Review’s Kevin Williamson has an article on the rampant corruption among elected officials.

But what caught my attention weren’t the parts about pro-gun control politicians trying to help sell weapons to terrorists. Instead, I especially appreciated the broader lesson he provides for readers.

James Madison famously observed that “if men were angels, no government would be necessary.” But he also understood that men do not become angels once they win elections, become police, or are appointed to positions of power. Our constitutional order strikes an elegant balance between policing the non-angels outside of government and constraining the non-angels within government, setting the ambitions of the three branches against one another and subdividing the legislative branch against itself. …Adam Smith’s formula for prosperity — “peace, easy taxes, and a tolerable administration of justice” — is the very modest ambition that conservatives aim for. Limited government is the tool by which government can be made to do good without necessarily being good, or being composed of good men. …The corruptibility of the political classes is fenced in by limiting the power of the political classes per se. You cannot expand the scope and scale of government without expanding in parallel the scope and scale of government corruption.

Amen to that. That’s the core message of this video I narrated, which explains that shrinking the size and scope of government is the only effective way to reduce corruption.

Remember the lesson of this superb poster: If more government is the answer, you’ve asked a very strange question.

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The political left obviously hopes that it can score political points by pitching some Americans against others with a campaign based on income inequality and class warfare taxation.

Is there any merit to this approach? Are the less fortunate suffering because some are succeeding? And would more government alleviate this problem, to the extent it actually exists?

George Will has a must-read column in the Washington Post on the topic of inequality, including a very relevant observation that the rich on Wall Street are the ones who benefit from the easy-money policy embraced by the Washington establishment.

In this sixth year of near-zero interest rates, the government’s monetary policy breeds inequality. Low rates are intended to drive liquidity into the stock market in search of higher yields. The resulting boom in equity markets — up 30 percent last year alone — has primarily benefited the 10 percent who own 80 percent of all directly owned stocks.

But his main point is that the lack of growth in the real economy has been very damaging to ordinary Americans.

And that lack of growth – acknowledged by both the Washington Post and Congressional Budget Office – is because politicians have been increasing the burden of government.

Richard Fisher, president of the Federal Reserve Bank of Dallas, says the total reserves of depository institutions “have ballooned from a pre-crisis level of $43 billion to $2.5  trillion .” And? “The store of bank reserves awaiting discharge into the economy through our banking system is vast, yet it lies fallow.” The result is a scandal of squandered potential: “In fourth quarter 2007, the nation’s gross domestic product (GDP) was $14.7 trillion; at year-end 2013 it was estimated to be $17.1 trillion. Had we continued on the path we were on before the crisis, real GDP would currently be roughly $20 trillion in size. That’s a third larger than it was in 2007. Yet the amount of money lying fallow in the banking system is 60 times greater now than it was at year-end 2007.” …there is abundant money for businesses. But, says Fisher, the federal government’s fiscal and regulatory policies discourage businesses from growing the economy with the mountain of money the Fed has created. This is why “the most vital organ of our nation’s economy — the middle-income worker — is being eviscerated.” And why the loudest complaints about inequality are coming from those whose policies worsen it.

Trillions of dollars sitting on the sidelines because of bad government policy.

Seems like Chuck Asay’s cartoon is right on the mark.

Let’s dig deeper into this topic by looking at what a couple of experts have written on the topic of inequality.

Here are some excerpts from a column by Ronald Bailey for Reason.

Here’s everything you need to know.

Are the poor getting poorer? No. In fact, over the past 35 years most Americans got richer. Has income inequality increased in the United States? Yes. Does it matter? Well, President Barack Obama thinks so.  …Is that true? No. …The real defining economic challenge of our time isn’t to end inequality. It’s persistent joblessness and weak economic growth perpetuated by feckless Obama administration policies.

If you want to know the details (and you should), Bailey explains that what matters is growth because that means all groups can enjoy rising incomes. And that’s exactly what you find in the data.

Using the CBO data, the Brookings Institution economist Gary Burtless has shown that from 1979 to 2010, the last year for which data are available, the bottom fifth’s after-tax income in constant dollars rose by 49 percent. The incomes of households in the second lowest, middle, and fourth quintiles increased by 37 percent, 36 percent, and 45 percent, respectively. The poor and the middle class got richer. …The rich got richer too, and they got richer faster. …So inequality in the U.S. has increased. But if most Americans’ incomes are rising, does it matter if some are getting a larger share?

He also makes the key observation that you shouldn’t just compare income groups over time.

This is because there is mobility. A poor household one year may not be part of the “bottom 20 percent” five years later.

Here’s more of what Bailey wrote.

Those worried about rising income inequality also often make the mistake of assuming that each income quintile contains the same households. They don’t. Between 2009 and 2011, for example, 31.6 percent of Americans fell below the official poverty threshold for at least two months, but only 3.5 percent stayed below it over the entire period. …In 2009, two economists from the Office of Tax Analysis in the U.S. Treasury compared income mobility in two periods, 1987 to 1996 and 1996 to 2005. The results, published in the National Tax Journal, revealed that “over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period.” …The Treasury researchers updated their analysis of income mobility trends in a May 2013 study for the American Economic Review, finding that about 75 percent of taxpayers between 35 and 40 years of age in the second, middle and fourth income quintiles in 1987 had moved to a different quintile by 2007. …In January, scholars from Harvard and University of California, Berkeley bolstered the Treasury economists’ conclusions. Parsing data from the 1950s and 1970s, the researchers, who are involved with The Equality of Opportunity Project, reported that “measures of social mobility have remained stable over the second half of the twentieth century in the United States.

Let’s continue with more wonky data.

Writing for National Affairs, Scott Winship delves into the issue, beginning with an explanation of the left’s hypothesis.

To hear many liberals tell it, increasing inequality is holding back growth, crushing the prospects of the poor and middle class, and even undermining American democracy. Such concerns are prominent in President Obama’s rhetoric, and seem also to drive key parts of his policy agenda — especially the relentless pursuit of higher taxes on the wealthy. …Perhaps the most common assertion regarding the ill effects of inequality in our time is that an unequal economy just doesn’t work for most people — that inequality impedes growth and harms standards of living.

He then unloads a bunch of data and evidence to show why the statists are wrong, including reliance on bad methodology.

…does it in fact reduce growth? There is no clear evidence that it does. …one of the most widely cited papers in the inequality debates — a 2011 study by IMF economists Andrew Berg and Jonathan Ostry showing that inequality hurts growth — suffers from this very problem of focusing primarily on developing countries.

But if the research looks at industrialized nations, it becomes apparent that it is not bad for growth when some people become rich.

Recent work by Harvard’s Christopher Jencks (with Dan Andrews and Andrew Leigh) shows that, over the course of the 20th century, within the United States and across developed countries, there was no relationship between changes in inequality and economic growth. In fact, between 1960 and 2000, rising inequality coincided with higher growth across these countries. In forthcoming work, University of Arizona sociologist Lane Kenworthy also finds that, since 1979, higher growth in the share of income held by the top 1% of earners has been associated with stronger economic growth across several countries.

There’s a lot more in the article, but this already is a long post. I encourage you to read both articles in their entirety.

The bottom line is that you don’t help poor people by savaging rich people (though it is very appropriate to target rich people who have undeserved wealth because of crony policies such as TARP and Ex-Im Bank).

Pizza FairnessThe left mistakenly acts as if the economy is a fixed pie and one person’s success necessarily means the rest of us are worse off. So in an effort to increase the relative amounts received by the poor, they pursue policies that cause the pie to shrink.

As Margaret Thatcher famously said, it seems they’re willing to hurt the poor if they can hurt the rich even more.

That’s not the way the economy works when people are liberated from the heavy yoke of statism.

Simply stated, you’re not going to be doing much to help the poor unless you focus on policies that generate faster long-run growth.

P.S. It’s not related to the issue of inequality, but George Will also included this delicious sentence in his column. It’s too good not to share.

We spend $1 trillion annually on federal welfare programs, decades after Daniel Patrick Moynihan said that if one-third of the money for poverty programs was given directly to the poor, there would be no poor. But there also would be no unionized poverty bureaucrats prospering and paying dues that fund the campaigns of Democratic politicians theatrically heartsick about inequality.

P.P.S. I also can’t resist sharing this video showing a European Parliamentarian denouncing the politicians and bureaucrats of the European Commission for hypocritically trying to squeeze more tax from the private sector while simultaneously benefiting from special tax breaks only available to themselves.

Gotta love any politician who is willing to quote Murray Rothbard and also state that government is a racket. And Dan Hannan has made similar points.

I can only wonder, by the way, what Mr. Bloom would say if he knew about the bureaucrats at the Organization for Economic Cooperation. They are totally exempt from income tax, yet they spend a lot of their time trying to impose higher taxes on other nations (including the United States).

You can also see him wax poetic in these two videos. And his better-known fellow MEP, Dan Hannan, also has weighed in on the same topics.

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On several occasions, I’ve observed that the poverty rate in America was steadily falling, but that progress came to a halt in the mid-1960s when the government declared a War on Poverty.

And I almost always included a chart showing the annual poverty rate over several decades.

Moreover, I posted graphs showing how government programs trap people in dependency because of very high implicit marginal tax rates. And that’s true in other nations as well.

But it didn’t matter how many times I revisited this issue, I was never clever enough to look at the poverty-rate data to estimate what would have happened if the federal government hadn’t become involved.

Fortunately, John Goodman of the National Center for Policy Analysis was insightful enough to fill the breach. He shows that the War on Poverty has made a big difference. But in the wrong way.

Poverty Goodman

Here’s some of what John wrote about the topic in a column for Forbes.

From the end of World War II until 1964 the poverty rate in this country was cut in half. Further, 94% of the change in the poverty rate over this period can be explained by changes in per capita income alone. Economic growth is clearly the most effective antipoverty weapon ever devised by man. The dotted line shows what would have happened had this trend continued. Economic growth would have reduced the number in poverty to a mere 1.4% of the population today—a number so low that private charity could probably have taken care of any unmet needs. …we didn’t continue the trend. In 1965 we launched a War on Poverty. And as the graph shows, in the years that followed the portion of Americans living in poverty barely budged.

John augments this analysis by looking at some of the social science research about poverty and government dependency.

The numbers are very depressing.

…here is something you may not know. Early on ― in the first decade of our 50-year experiment with an expanded welfare state ― carefully controlled experiments funded by the federal government established without question that welfare changes behavior. It leads to the very behavioral changes that keep people in a state of poverty and dependency. …The experiments were all conducted by social scientists who believed in the welfare state and had no doubt about its capacity to be successful. …The experiments were all controlled. Randomly selected people were assigned to a “control group” and an “experimental group.” …the results were not pretty. To the dismay of the researchers, they largely confirmed what conventional wisdom had thought all along. …The number of hours worked dropped 9% for husbands and 20% for wives, relative to the control group. For young male adults it dropped 43% more. The length of unemployment increased 27% among husbands and 42% for wives, relative to the control group. For single female heads of households it increased 60% more. Divorce increased 36% more among whites and 42% more among blacks. (In a New Jersey experiment, the divorce rate was 84% higher among Hispanics.)

President Obama and other folks on the left don’t seem overly interested in this data.

Instead, they beat the drums about class warfare and income inequality.

They want us to believe the economy is a fixed pie and that all of us somehow get less if some entrepreneur becomes rich.

But John’s point from the column is correct. Economic growth is the way to help the poor, not redistribution.

Unfortunately, many politicians are hostile to the types of policies that produce more growth. Maybe it’s because they don’t understand economics. Or maybe they understand economics but don’t care because they think they’ll be more successful at the ballot box if they pursue the politics of envy and division.

But regardless of motive, bigger government doesn’t have good results, as illustrated by this Gary Varvel cartoon.

Political Cartoons by Gary Varvel

This Chip Bok cartoon, featuring Obama with his ideological soulmate, also is worth sharing.

Political Cartoons by Chip Bok

P.S. Margaret Thatcher has the best-ever takedown of the left’s inequality agenda.

P.P.S. If you want to get agitated, click here to see how a bureaucracy in Paris is using American tax dollars to push a crazy new definition of poverty. Why? To promote more redistribution.

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A bunch of well-connected rich people and government officials are descending upon Switzerland for the annual World Economic Forum meeting in Davos.

This upsets many people, and perhaps with some justification. After all, bad things often happen when big business and big government intersect.

But some folks reflexively think that wealth is bad and they would like us to believe that the economy is a fixed pie, meaning that the rich have more money because the poor have less money.

If you think I’m exaggerating, check out a new report from Oxfam, a UK-based group that was created to alleviate poverty but has largely morphed into a left-wing pressure group.

The folks at Oxfam complain about the supposed “capture of opportunities by the rich at the expense of the poor and middle classes” and that “tax rates for the richest have fallen in 29 of the 30 countries.”

Here are some excerpts from a report in the EU Observer.

As the world’s richest and most powerful men and women prepare to meet in the Swiss resort of Davos for the annual World Economic Forum on Wednesday (22 January), the British development charity, Oxfam, has issued a new report on global inequality. According to its findings, the wealth of the world’s 85 richest people – €81.2 trillion – amounts to that of the poorest half of the world population, or 3.5 billion people. …”In Europe, austerity has been imposed on the poor and middle classes under huge pressure from financial markets whose wealthy investors have benefited from state bailouts of financial institutions,” the charity said. Financial deregulation in the US has contributed to the situation, in which the richest one percent of the population has more money than ever since 1933.  …The charity said Davos participants should reverse the trend and pledge to support higher taxes for the rich, while refraining from using their wealth to seek political favours.

There are several parts of this excerpt that deserve attention, including passages that are correct (such as bailouts giving undeserved money to the rich) and passages that are nonsensical (the financial crisis was caused by intervention, not deregulation).

But I want to focus solely on the inequality issue. Let’s assume Oxfam is right and that the world’s 85 richest people have $81.2 trillion of wealth. The group obviously wants us to think this accumulation of wealth is bad and that it somehow comes at the expense of the rest of us.

Tim Carney of the Washington Examiner hits the nail on the head, explaining that there’s a big difference between honest wealth and riches obtained through government coercion.

…is it a bad thing for a country to have some really rich people? Again, it depends on how they got rich. Sutirtha Bagchi of the University of Michigan’s business school and Jan Svejnar of Columbia’s School of International and Public Affairs studied how inequality correlates with economic growth. In general, more inequality meant slower growth, and less inequality meant faster growth. But in many countries, over various time periods, growing inequality had no effect on economic growth. The new study suggests that an increase in inequality hurt the economy when the rich were getting rich through political connections. That is, inequality hurts the economy when “a large share of the national wealth is held by a small number of politically connected families,” as the authors put it. …Bagchi and Svenjar took pains to classify political billionaires as narrowly as possible. …The political billionaires were only people who “would not have become a billionaire in the absence of political connections that resulted in favoritism and/or explicit government support.”

The oft-missed lesson here is that undeserving wealth generally is obtained because of big government.

Which reminds me of a very astute observation by a former Cato colleague, who wrote that, “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.”

Carney continues, pointing out that wealth obtained through markets is good. Such success creates a bigger pie and helps boost living standards for everyone.

But wealth achieved via government is cronyism, and that contributes to economic stagnation.

When a country’s wealthiest got wealthy through market means, the resulting inequality has no negative effect on economic growth. This jibes with what we know about free markets. If people can get rich by providing valuable things at good prices, then society will get more valuable things at good prices—and people across the income spectrum benefit. But if people get rich by pocketing subsidies and using the state to crush competitors, then they gained their wealth at the expense of everyone else. Bill Gates became a billionaire by making and selling something that makes regular people more productive and more connected. Buffett got rich largely by providing capital to underfunded but well-run businesses. If Bagchi’s and Svejnar’s findings are correct, then the bottom line is this: Inequality itself doesn’t hurt the economy. Cronyism hurts the economy.

I fully agree with Tim’s analysis, though I would have drawn a distinction between the younger Warren Buffett, who was a savvy investor and the older Buffett, who has climbed into bed with the political elite.

The bottom line is that the poor aren’t poor because of honest rich people. The poor are suffering because of big government, including the cronyism that lines the pockets of dishonest companies and individuals that feed at the public trough.

Unfortunately, many insider leftists are perfectly content with those policies and they use inequality to distract voters from the real problem.

There are honest leftists, of course, and they presumably would be outraged by the sleaze in national capitals. Their problem is that they genuinely think the economic is fixed pie. Or they think that inequality is such a bad thing that they would be willing to reduce incomes for the poor if it meant the rich suffered even more.

If you don’t believe me, watch this marvelous video of Margaret Thatcher debunking the left.

And my old grad school colleague Steve Horwitz also has some very sage observations on income inequality and class warfare.

P.S. In its report on inequality, Oxfam also went after tax havens and said more revenue for government would help reduce poverty.

Oxfam also estimated that €15.5 trillion of the wealth is hidden from the taxman in offshore accounts, at a time when governments are cutting public spending. …tax avoidance by EU and US corporations in Africa is depriving its governments from resources which could be use to fight poverty.

I wrote a study years ago exposing Oxfam’s sloppy methodology on tax competition issues. No wonder they’ve been labeled as being part of the “tax taliban.”

But what really irks me about that passage is the assumption that bigger government reduces poverty. That’s nonsense. The data shows that growth is the best way of helping the poor.

Christie JokeP.S. I wrote yesterday about Chris Christie’s problems in New Jersey. I said his real challenge was the need to reduce the burden of government, not the bridge scandal.

But I’m a sucker for good political humor, so enjoy this image that appeared in my inbox.

P.P.S. Since Oxfam criticized tax havens, I can’t resist calling your attention to my video tutorial on tax competition and tax havens.

Simply stated, we need some external check on the greed of the political class.

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I’ve shared many charts over the years, but two of the most compelling ones deal with poverty.

Poverty Rate DataThe numbers in this chart, which are based on Census Bureau data and scholarly studies (see here, here, here, and here), show that the poverty rate was steadily falling in the United States – until the federal government decided to launch a so-called War on Poverty.

Once Washington got more involved and started spending trillions of dollars, we stopped making progress. The poverty rate has changed a bit with shifts in economic conditions, but it’s stayed remarkably steady between 11 percent and 15 percent of the population.

So why have we stopped making progress? This second chart shows how redistribution programs create a dependency trap. The plethora of handouts from government make self-reliance and work comparatively unattractive, particularly since poor people are hit with very high implicit marginal tax rates.

And just as rich people respond logically to incentives, the same is true of poor people.

In a recent debate with a representative of the Center for American Progress, I tried to make these points. I doubt I had any effect on her outlook, but hopefully viewers began to see that the welfare state has been bad news for taxpayers and bad news for poor people.

Our debate was cut short by the host, but I think it was a fair representation of each side’s views.

And if you want more information on this topic, my former colleague from my days at the Heritage Foundation, Robert Rector, assesses the War on Poverty for today’s Wall Street Journal.

He starts with some very sobering numbers.

Fifty years later, we’re losing that war. Fifteen percent of Americans still live in poverty, according to the official census poverty report for 2012, unchanged since the mid-1960s. Liberals argue that we aren’t spending enough money on poverty-fighting programs, but that’s not the problem. …The federal government currently runs more than 80 means-tested welfare programs that provide cash, food, housing, medical care and targeted social services to poor and low-income Americans. Government spent $916 billion on these programs in 2012 alone, and roughly 100 million Americans received aid from at least one of them, at an average cost of $9,000 per recipient. …Federal and state welfare spending, adjusted for inflation, is 16 times greater than it was in 1964. If converted to cash, current means-tested spending is five times the amount needed to eliminate all official poverty in the U.S.

He then explains that poor people don’t suffer from material deprivation (which may explain why the Obama Administration wants to manipulate the numbers to justify more welfare spending).

…the typical American living below the poverty level in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV. His home is larger than the home of the average nonpoor French, German or English man. He has a car, multiple color TVs and a DVD player. More than half the poor have computers and a third have wide, flat-screen TVs. The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year.

Robert then gets to the heart of the issue, explaining that the welfare state has expanded dependency and exacerbated social pathologies.

…consider LBJ’s original aim. He sought to give poor Americans “opportunity not doles,” planning to shrink welfare dependence not expand it.  …By that standard, the war on poverty has been a catastrophe. The root “causes” of poverty have not shrunk but expanded as family structure disintegrated and labor-force participation among men dropped. A large segment of the population is now less capable of self-sufficiency than when the war on poverty began. …In 1963, 6% of American children were born out of wedlock. Today the number stands at 41%. As benefits swelled, welfare increasingly served as a substitute for a bread-winning husband in the home. …children raised in the growing number of single-parent homes are four times more likely to be living in poverty than children reared by married parents of the same education level. …Even in good economic times, a parent in the average poor family works just 800 hours a year, roughly 16 hours weekly, according to census data. Low levels of work mean lower earnings and higher levels of dependence.

Mr. Rector also has some specific suggestions in his column, most of which seem sensible, but this is where I think my idea of sweeping decentralization and federalism is very appropriate.

P.S. Thomas Sowell’s indictment of the welfare state is must reading.

P.P.S. Some honest leftists now acknowledge that big government creates worrisome forms of dependency.

P.P.P.S. If you want to know how dependency varies by state, here’s a map showing welfare payments and another map showing food stamp usage.

P.P.P.P.S. Shifting to a bigger stage, my least favorite international bureaucracy has made the preposterous claim that poverty is a bigger problem in America than it is in basket-case nations such as Greece and Portugal. Not that we should be surprised since the OECD actively urges a bigger welfare state in the United States.

P.P.P.P.P.S. And don’t forget our Moocher Hall of Fame if you want examples of the human cost of the welfare state.

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