Eat the Rich? Au Contraire. Here’s Why We Need Them

Gordon Gekko back for the global recession

By Cathy ReisenwitzLibertyChat.com –

Inside a recent analysis of Jill Abramson’s firing from the New York Times, Jacob Bacharach reveals a serious misunderstanding of how economies work. There are certainly lots of good reasons to care about income inequality. However, failing to understand the utility of high incomes leads to uninformed, knee-jerk “eat the rich” policies. In practice, these laws and regulations have the unintended consequences of actually hurting the poor more than income inequality ever could, by stalling economic growth.

The piece is interesting in full, but one false assertion may help elucidate the source of much left-wing handwringing over income inequality.

Here’s the portion:

A few brief thoughts on the New York Times-Sulzberger-Abramson affair.

It’s awfully difficult to feel badly for income discrepancies where people are making hundreds upon hundreds of thousands of dollars. Beyond a certain income level, which I would set at significantly less than $100,000 per year, it’s all just surplus value; its only purpose—if that word applies—is luxury purchasing for purposes of status signaling. This is not to say that women executives should be paid less than their immediate male counterparts; rather, no one should be paid so much money to be a general manager.

Mr. Bacharach here may be right that it’s harder to feel bad for Ms. Abramson than it is to feel bad for Lupita the housecleaner. But that’s really neither here nor there regarding his next claim, which is that the only purpose of salaries over $100,00 per year is “luxury purchasing for purposes of status signaling.” And that this proves his claim after that, which is that “no one should be paid so much money to be a general manager.”

The claim that high incomes are only good for luxury purchasing completely ignores some fundamental truths about economic growth. Namely, believing it requires being wrong about what high incomes are used for.

If we want a living wage for Lupita, we need to be down with economic growth. That means higher wages and lower costs of living for everyone, at all income levels. And how do we get economic growth? Wikipedia says that “the primary driving force of economic growth is the growth of productivity, which is the ratio of economic output to inputs (capital, labor, energy, materials and business services (KLEMS).”

In English, that means innovation. Innovation is getting more from what you already have. Economies grow when entrepreneurs discover how to get more work done in fewer hours and how to get better products made with fewer materials. Innovation saves time, money, and energy, resulting in a better standard of living across all incomes.

What most people, especially those who aren’t rich, often don’t think about is how innovation itself costs money. There are two primary sources for innovation: startups and capital investment. Startups need capital to enter the marketplace with their innovative technologies. Think Shark Tank. Entrepreneurs need money to build, advertise and deliver their disruptive ideas. Capital investment is how we describe the process establish businesses go through to introduce their innovations to the market. For instance, every time Intel comes up with a faster, cheaper processor, they have to spend money buying or adapting machines to build it.

Here’s where the rich come in, if we don’t eat them first. After a certain threshold, the vast majority of earnings end up in savings and investments. In short, the rich save more than the poor. As a percentage of income, the poor spend way more on “luxury purchasing for purposes of status signaling” than the rich. While this has been demonstrated empirically, it also just makes sense. The poor must spend nearly all they take in just to survive. The rich, on the other hand, can and do save and invest their “surplus” income. That’s part of why they’re rich.

It’s those savings and investments which make up the bulk of the money for startups and capital investment. The rich aren’t just buying bigger and bigger yachts, they’re lending money to Mark Zuckerberg to build Facebook.

Whether or not to care about income inequality is ultimately a value judgment. However, we should all want higher standards of living for the poor. Easily falsified claims about how the rich use their incomes don’t just fail to further the conversation on how to get there. They also, I suspect, form the backbone of calls for heavily punitive taxation schemes. These schemes may be justified on the basis of eliminating income inequality. But they come at the cost of economic growth. The truth is that incomes high enough to produce surplus income are necessary for economic growth. And so, if we truly care about improving the lot of the poor, and not just punishing the rich, we must accept them.

 

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Cathy Reisenwitz is an Editor at Young Voices and a D.C.-based writer and political commentator. She is Editor-in-Chief of Sex and the State and a blogger for the Huffington Post and writer for Bitcoin Magazine. Her writing has appeared in Forbes, the Chicago Tribune, VICE Motherboard, Reason magazine, Talking Points Memo and other publications. She has appeared on Fox News and Al Jazeera America.

She has spoken on topics of economic freedom, Bitcoin and feminism at CPAC, Tea Party conferences, CryptoCurrency Conference, ISFLC, the Heritage Foundation and various other events.

When not fighting the state, she reads girl blogs, tech blogs, politics blogs and career blogs. She loves non-fiction books (currently on a positive psychology kick) and working out.

 

Comments

comments

One thought on “Eat the Rich? Au Contraire. Here’s Why We Need Them

  • May 19, 2014 at 6:37 pm
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    Speaking as a fairly typical liberal:

    I’ve got absolutely no problem with someone being rich. Totally fine. I’m especially happy if they use their money to invest in other people’s ideas, acting as venture capitalists and other forms of investors, using their money to help other people reach their dreams, and making more money in the process.

    That’s lovely. I’m all in favor of that.

    What I’m against is people using their wealth and power to game the system in order to write their own rules and get unfair advantage of others. If you are using your wealth to put up roadblocks to other people coming in and competing, that’s bad. If you’re using your connections to regulators to create artificial shortages to drive up prices and then selling at higher profits, I’ve got a problem with that.

    And I think your average libertarian, and your average conservative, would more or less agree with me. I think that a libertarian and a liberal have different ideas of the proper solutions to that, but I think we all agree that people using their power to game the system and deform the market is bad.

    I feel that certain sorts of jobs are basically parasitical: if your job is coming up with weird financial products which rely on loopholes and corners in the market to skim off value, without actually ADDING value to anything, you’re a parasite. But, so long as there’s not TOO much of that, society can survive. The problem is that those kinds of things have gotten to the point where a few people can make enough money to buy politicians and write regulations which allow MORE loopholes, and MORE ability to skim value out of the market, which leads to more ability to write one’s own regulations… and you get to our situation now, where so-called “hedge fund managers” aren’t actually doing any of the useful functions of the market, but merely using tricks to become the wealthiest people in the nation.

    You put your money into other companies, to help those companies use their capital to do useful things? Fantastic. You create portfolios so that people with less money can get a piece of that action, and that a middle-class person can use their retirement savings to help other people create value? Great! Thank you!

    You use your money to break the system in order to extract the juicy, juicy brain meats? THEN we got a problem.

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