In the USA, economic inequality has in recent years found a place in the spotlight of public discourse. As with other issues, politicians have fanned the flames of contention to the point that civil discussion and polite disagreement are virtually nonexistent. Instead, those loyal to leftist ideology rant against holders of wealth, portraying them as undeserving pariahs whose economic status is due purely to unfair white privilege. [see footnote 1]
The idea that wealthy people are bad people and enemies of the poor has a good deal of appeal; consider the popularity of the phrase “the one percent” and the Occupy movement’s slogan “We are the other 99%.”. Dividing the citizenry neatly into just two categories, the haves and the have-nots, conveniently enables politicians to gain power by appealing to one group or the other. Of course, criticizing the greedy rich works as long as we ignore those below us on the economic scale, compared to whom we may be the rich. For an eye-opening perspective on this, visit the website globalrichlist.com. [see footnote 2]
The argument between leftists and staunch conservatives will no doubt continue, with each side convinced the other is misinformed, ill-intentioned, or plain stupid. However, it may be instructive to reflect on the country’s experience with governmental antipoverty efforts, particularly federal programs, in an attempt to understand some of their actual effects.
One can argue that modern federal antipoverty programs are an outgrowth of the War on Poverty initiated by Lyndon Johnson in 1964. Estimates of spending on such programs in the years since then range from about $12 trillion (CATO Institute estimate) to as high as $22 trillion (Heritage Foundation estimate). Using the lower number, which averages $226 billion per year, we can estimate federal antipoverty spending amounting to $1490 per year for every man, woman and child ($12 trillion divided by average population 1964-2016 of 152 million, divided by 53 years). With the Census Bureau estimating 14.5% of the population still living in poverty, it seems reasonable to conclude that 53 years of antipoverty spending has been less than successful. The liberal response to this observation may be that we have not spent nearly enough to solve the problem, while the conservative reaction asserts we have wasted trillions of dollars. Meanwhile, some leftists think in terms of a systemic change: redistribution of wealth to correct what they see as the injustices of “income inequality” and/or “wealth inequality” (note the use of equal rather than equitable).
While liberals, conservatives, and leftists argue about how to solve the poverty problem (assuming it can be solved), I suggest we consider what can be described as the unintended consequences of the War on Poverty: how trillions of dollars of spending aimed at mitigating disparities in income and/or wealth, even if well-intentioned, may in some ways have actually exacerbated the issue. What follows is an attempt to describe step by step how this occurs.
1. The federal government decides to spend billions of dollars on antipoverty programs. This spending must be financed one of three ways: tax, borrow, or increase the money supply (the last option is controlled by the Federal Reserve, which leads to the question of whether it’s a good idea for key drivers of the economy, such as money supply and interest rates, to be controlled by a group of bankers rather than directly by the federal government, but that’s another topic ....).
2. Since the federal government has a penchant for deficit spending and is hesitant to raise taxes, the spending is financed through borrowing. The primary means of doing this is by issuing government bonds (there are other ways, such as, raiding the social security trust fund, which Congress has already done to the tune of about $2.8 trillion, but that’s another topic....). Whoever wants to loan money to the government does so by buying bonds.
3. Per research by the Independent Institute, U.S. citizens and their institutions currently hold about one third, or $6 ½ trillion in federal debt. That is, they have loaned that amount to the government. When we talk about people’s wealth or the value of their assets, government bonds are included, and interest earned on the bonds is income.
4. The more debt the government owes, the larger the amount it must pay in interest on the borrowed money. This means a greater share of its budget must be used to pay interest on the national debt, making that money unavailable for any other purpose, including antipoverty spending.
5. As with any borrower-lender transaction, the interest rate on federal bonds is determined by two factors: (1) the level of risk that the borrower will default and not pay back the money borrowed (fortunately, this is viewed as very low for the federal government; after all, there is always the option of increasing the money supply to provide funds for loan payments), and (2) supply versus demand for the bonds, i.e. the amount people want to loan to the government compared to how much it needs to borrow at any given time. If supply is relatively great, interest rates remain low.
6. Now, here comes a wild card; stick with me. In recent years, the Federal Reserve has become a larger lender of money to the federal government, currently holding about $2.5 trillion in US bonds. The fed has ostensibly bought bonds to stimulate the economy (another topic for another day ....). This action, plus the Fed's policy of keeping interest rates at historic lows, results in low-interest rates for US bonds. This is good for the federal budget, but not for the bondholder.
7. The lower the interest rate on bonds, the more investors seek higher returns elsewhere. The most common alternative is investing in equities (stocks and mutual funds). Thus, low bond yields drive money out of the bond market and into the stock market, and a surplus of money in the stock market then drives stock prices up. It is important to note that stock prices are not determined purely by companies’ performance, but also by the supply and demand effect of the amount of money being invested in the total stock market.
8. When the stock market rises, the value of the stocks (which is really just a number on paper or in a computer somewhere) owned by individual and institutions increases. Thus, the wealth of those who own the stocks increases, and the gap between rich and poor increases based on the move in stock prices. This does not mean owners of the stocks have any more money available to them, unless and until they sell their stock.
9. Money that could be invested is called capital. Having capital is seen as a good thing, though the objective of those who have capital is to invest it for a return; that is, to put it to work to earn more. Because the stock market is inherently risky (stock prices could plunge overnight, and have), bonds are a much safer investment. But, as mentioned, low bond returns force money toward the stock market, which inflates stock prices and therefore inflates stock owners’ wealth. Amassing capital is of limited benefit if it cannot produce a reasonable return.
10. The end result of this chain of events is that deficit spending by the federal government leads to borrowing, which increases bond sales and interest expense. The dollar amount of bonds held by those who loan to the government are included in the lenders’ wealth. Low-interest rates drive money to the stock market, inflate stock prices, and increase the stock owners’ wealth. Thus, the wealth of bond and stockholders (again, a number on paper or in a computer) increases, and the numbers tell us the gap between rich and poor has again increased.
Some final thoughts:
1. I am not at all suggesting that the financial effect of deficit spending is unique to money spent on antipoverty programs. In fact, the effect is identical for any and all deficit spending (for example, to fund war .... another topic .... sigh). I will leave it to those who think economics is a science to ferret out the best course of action Congress could take (not that they will) for the long-term health of the economy and reduction of poverty.
2. Discussion of poverty and potential solutions involves both economic and moral issues. The solution is not elimination of government efforts to aid the poor, though continuation of past practices does not appear likely to produce a successful result. The continuing problem of poverty in the U.S. may, in fact, be due as much or more to social and cultural issues (e.g., disintegration of the traditional family) as to economic ones. What is certain is that approaching the issue with political prejudice and animosity does not help.
Footnote 1: Success (by the world’s definition) requires two things: capability and ambition. Capability comes from a combination of ability to learn, willingness to learn, and opportunity to learn. There is a grain of truth in the ‘privilege’ argument, white or otherwise, as most who succeed economically have an upbringing that values education and engenders the ambition required to put their capabilities to work.
Footnote 2 (to Christians): The Bible never suggests that wealth is wrong, nor does it suggest everyone should have equal wealth. It does condemn acquisition of wealth by sinful means. It also says a lot about the responsibility of the wealthy to care for those who cannot provide for themselves (Scripture often uses the examples of widows and orphans as representative of persons who in the context of the time were typically left destitute).
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