The Archbishop of St. John's, Martin Currie, a man whom I respect greatly, has taken on the laudable task of reducing poverty in our province. It's interesting that I'm writing this article now because just yesterday I wrote a similar one, but this morning I was made aware of a religious coalition in the province which aims to reduce poverty, of which Archbishop Currie is a member. Unfortunately, I think he may be barking up the wrong tree when it comes to solutions.
The archbishop is a member of the multi-religion group called "Religious Social Action Committee". Its stated goal is to reduce poverty, but I'm afraid its solutions are off-base and need to be seriously re-evaluated. They basically come at poverty from the tired old perspective of the NDP and other socialist groups which claim the reason people are poor is because other people are far too rich, that we need to "spread the wealth around". That's essentially the idea behind communism. On the surface, it sounds like a fantastic idea, but history, and economics shows it is intellectually bankrupt.
One of the big themes these people constantly harp on is the "growing gap between rich and poor". At first, that sounds fine, but when you scratch the surface a little, you realize it is somewhat illogical. If the average poor person at Time 1 has $10,000 per year and the average rich person has $100,000, but then at Time 2, the average poor person has $20,000 per year and the average rich person has $500,000, then the gap between rich and poor has grown substantially. But the poor are far better off than before. The rhetoric of the gap between rich and poor is thus invalid. It has gone from concern for the poor to envy or hatred toward the rich. I have not accumulated too many statistics, but in our province, the median income (which counters the effects of outliers like very rich people) shows an increase in income from $19,400 per year in 2005 to $24,550 in 2009, for the median person, which means your typical Joe. If the rich are indeed getting richer in Newfoundland, it seems so are the "poor".
What this underlies is a misunderstanding of wealth? Most people conceive of wealth as a zero-sum game, where if one person gains, someone else loses. So if a person becomes a millionaire, that means lots of people lost that potential money. But this is demonstrably false. 100 years ago, there was far more poverty than now, and also far fewer millionaires, even after accounting for inflation. But everyone rose in wealth. That's because wealth is created. As a good example I heard one time, most people conceive of wealth as a pie, where if one person receives a larger piece, everyone else must make do with a smaller piece. But in fact, new pies are created all the time, and real wealth is created.
So what solution does the Religious Social Action Committee suggest for reducing poverty? Of course, they propose the old canard of raising taxes on the people and companies who have "too much" money. They have decided, by the way, that too much money is people making more than $250,000. They say they should get a higher tax rate and people making more than $500,000 should get an additional surtax on top of that. Sounds lovely, but doing this will probably not result in the intended effect. Thomas Sowell, a preeminent economist, notes that tax rate and tax revenue are two different things and often they are negatively correlated. He points out that the Bush tax cuts that everyone is up in arms about actually increased tax revenue in the country. The same with the Reagan tax cuts and the Kennedy tax cuts.
The knee-jerk reaction to "tax the rich" is faulty on other levels as well. Many companies, such as those offering certain services, or even manufacturers, etc are not geographically bound. They set up shop in favorable business environments. If Newfoundland raises taxes, these companies will decide to locate elsewhere and thousands of jobs could be lost. The key to economic success is increased productivity. By pushing away large companies, the province is reducing the potential of people to earn money. Also, because productivity is the key to economic success both individually and for society as a whole, simply redistributing wealth will not add any value. What we need is an influx of money, not redistribution.
The problem with this anti-poverty group is that they are unable to see that what they are advocating is exactly what got us here in the first place. Too much government is the problem, and they just want more government. Political parties are all too willing to use this point of view to their advantage. Even the theoretically more fiscally conservative group, the PCs, never speak about the role of government or how much government is necessary, but instead focus on what the government will do for "you". How it will spend more and more money on countless programs. The problem with government programs is that they are awash in bureaucracy and red-tape. They are inefficient and there is no incentive or mechanism to improve.
So, let's get back to basics. What makes a company successful? A company is successful if it provides products or services more people want and creates more value. The executives who create companies that do this best are also compensated the best. Bill Gates became a billionaire by providing billions of people with technology that improved their lives. No one forced anyone to buy any of Microsoft's products. People willingly chose to buy them, and because Mr. Gates satisfied more people, he received remuneration for that. By doing what he did, he created tens of thousands of jobs, and by increasing productivity, he increased the wealth of the entire country.
Many executives receive very high salaries, but that is because they are creating many multiples of that in value for the company. If they are not creating value for consumers, they don't earn as much money. We should be attracting these people who know how to create business and increase wealth. By doing so, we can employ more people and improve their lives. Why then, is there a knee-jerk reaction to tax them to the hilt which will ultimately force them out?
But let's stop for a second and ask what the logical conclusion of this anti-poverty group would be. They want everyone to earn the same income. They want huge government control, high taxation, etc. This is basically the definition of socialism. So we are really comparing socialism and capitalism. It would be interesting to see what would happen if half the country ran on socialist concepts and the other half ran on capitalist concepts. This would be a good experiment. Fortunately, it has already been done! After World War II, Germany was divided into East and West, Socialist and Capitalist. The results are quite obvious. While East Germans were starving, and risking their lives to escape to West Germany, West Germans were far more successful, and their economy improved dramatically. How many people each year put build a rickety boat and risk their lives to escape the capitalism of Florida to enter the socialism of Cuba? None. But the route the other way is quite busy.
As Nobel Prize Winning Economist Milton Friedman once said, "So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system."
Let's remember that as we try to fight poverty.
