Blame the Rich!

Recently
by Peter Schiff: Out
of Order



The political left wing has long tried to cast doubt on the fairness,
and even the efficacy, of free market capitalism by branding it
as a “trickle down” system. This epithet is meant to show
how the middle and lower classes are dependent on scraps of wealth
that happen to fall from the buffet table of the rich. This characterization
of an unfair and inefficient system has helped them demonize policies
that lower taxes (if they also extend to the wealthy) and reduce
regulation on business.

To correct
these supposed problems, they have long called for policies to redistribute
wealth or for government to inject funds directly into the economy.
Either mechanism puts money into the hands of everyday consumers
who they claim to be the true engines of economic growth. They believe
that consumer spending lies at the root of the economic pyramid.
When people spend, business owners are able to sell more products,
hire more workers, and reap more profits. In essence, they believe
in a system of “trickle up” economics, whereby prosperity
flows upward from government into the lower and middle classes and
ultimately to the upper class.

Conversely,
they argue, if consumers aren’t buying, business sales decline and
workers lose jobs. The jobless spend less than the employed, putting
even more pressure on businesses. This leads into a vicious cycle
of falling sales and increased unemployment. They believe that if
a shock is not applied to reverse the cycle it is possible for an
economy to regress, in theory, right back to the Stone Age. Using
such logic, it is easy to identify the foundation upon which the
economy rests: it’s the spending, stupid. Some progressives have
likened this process to a natural ecosystem wherein government spending
is the rain that makes grass grow. The grass attracts zebras and
antelopes (consumers), which then offer sustenance to the lions
(capitalists).

If this is
your diagnosis, then your prescription should be patently obvious:
restore the demand lost through unemployment and get people spending
again. How to accomplish this is also equally simple: take the money
from the rich who really aren’t using it anyway. Without entering
into a parallel discussion of fairness, demand side economists simply
see the redistribution of money from the rich as a way to generate
economic growth, which benefits society as a whole. As they see
it, the rich have more money than they need to satisfy their own
personal demand. No matter how rich, a single individual can only
eat in so many restaurants, buy so many cars, or go see so many
movies. The money they don’t spend is saved instead, thereby sucking
needed demand out of the economy. In contrast, the lower and middle
classes spend a much higher percentage of their net worth. To break
the vicious cycle, all that is needed is to direct these idle funds
where it will be spent rather than saved. In a June 19th Wall
Street Journal
cover story, reporter Jon Hilsenrath underscores
this point in explaining why the impact of the Fed’s low interest
rate policies are being weakened by the current preference for high
credit score borrowers. Says Hilsenrath, “Financially secure
households are less likely than lower-income households to spend
their interest rate savings. Wealthier households are more likely
to save or invest.”

A policy prescription
such as this is seductive. It allows people to advocate a moral
position (it’s a shame that the poor don’t have as much as the rich)
in purely practical terms (redistribution creates economic growth).
And if spending is the panacea, then government can easily wipe
out suffering, even if they lack the political ability to raise
taxes. After all, what stops them from printing all the money needed
for people to spend the economy back to health? According to Nobel
Prize-winning economist Paul Krugman, only the political cynicism
of Republicans, who try to wring votes out of Americans’ misplaced
hopes for upward mobility and their stubborn fixation on thrift,
prevents this painless and readily available cure.

But as usual,
they have it exactly backwards. The savings that they find so unproductive
is actually the foundation upon which the economy rests. Nothing
can be consumed until it is produced. The act of spending is meaningless
without something to buy. The savings of the rich forms the capital
that funds business investment which increases productivity. The
more that society produces, the more that can be consumed. The key
here is the supply, not the demand. The grass that feeds the zebras
comes from seeds, not rain. Capitalists provide the surplus seeds
that are planted.

Demand always
exists and does not need to be stimulated by cash redistribution.
21st-century Americans are no more desirous of cell phones than
their parents were. But in 1980 cell phones were in very limited
supply and were therefore very expensive. They were the trophy possessions
of the super-rich. The reason why they are now as ubiquitous as
key chains is not that government stimulated demand, but that industry
figured out how to supply them far more efficiently. The supply
satisfied the demand. Investment in the telecom sector, which came
from real savings of Americans, allowed for that increased productivity.

In this example,
the savings of the wealthy and the innovation of entrepreneurs combined
to create a huge benefit for society. Call it trickle down if you
want, but it would be more honest to simply call it effective. This
is the system that built this country. Relying on trickle up will
surely destroy it.

June
23, 2012

Peter
Schiff is president of Euro Pacific Capital and author of
The
Little Book of Bull Moves in Bear Markets
and Crash
Proof: How to Profit from the Coming Economic Collapse
. His
latest book is
The
Real Crash: America’s Coming Bankruptcy, How to Save Yourself and
Your Country
.

Copyright
© 2012 Euro Pacific Capital

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