When the Rich Get Rich, Do the Poor Really Get Poorer?

When a dubious economic theory turns up as the punch line in a wildly popular song, it’s safe to say that the proposition has deeply penetrated the public’s consciousness.

The odd notion that when the rich get richer, the poor get poorer received recognition and publicity in the jaunty foxtrot Ain’t We Got Fun, introduced as part of the vaudeville revue Satires of 1920 and then a huge worldwide hit in recordings and performance after that.

The lyrics, co-written by Tin Pan Alley legend Gus Kahn, describe a young couple facing hard times:

Not much money, Oh, but honey
Ain’t we got fun!
The rent’s unpaid dear
We haven’t a bus
But smiles were made dear
For people like us

In the winter in the Summer
Don’t we have fun?
Times are bum and getting bummer
Still we have fun
There’s nothing surer
The rich get rich and the poor get…. children.

The idea that the rich get rich (or richer) as the poor get poorer had already established itself a century ago as such a cherished cliche that the songwriters knew the audience would reach for the familiar word to rhyme with surer, and they deliver a laugh by mentioning children instead. The lyrics go on to describe the arrival of twins for the merry, love-struck couple (twins and cares dear/come in pairs dear) and then flaunt the poorer expectations with a darker edge.

Landlords mad and getting madder
Ain’t we got fun?
Times are bad and getting badder
Still we have fun
There’s nothing surer
The rich get rich and the poor get laid off.

This little song drew portentous comment from some of the most significant writers of the twentieth century. George Orwell (in The Road to Wigan Pier) saw it as poignant expression of working class anxiety during the painful recession that followed World War I. Citing the bittersweet lyrics he noted that all through the war and for a little time afterwards there had been high wages and abundant employment; things were now returning to something worse than normal, and naturally the working class resisted. The men who had fought had been lured into the army by gaudy promises, and they were coming home to a world where there were no jobs and not even any houses. There was a turbulent feeling in the air.

THE RICH AND THE REST OF US

While novelists ruminated on the vast chasm between the rich and the rest of us, activists and radicals dedicated their lives to closing that gap by shattering the power of the exploiter class. In 1909, the IWW (International Workers of the World) proudly published the first edition of The Little Red Songbook, with ballads and anthems meant to rally laborers everywhere into One Big Union and to smash capitalism once and for all. The preamble to this collection baldly declared: The working class and the employing class have nothing in common. Between these two classes a struggle must go on until workers of the world organize as a class, take possession of the earth and the machinery of production, and abolish the wage system. The most famous hymn in the anthology, Ralph Chaplin’s Solidarity Forever, borrowed the melody of The Battle Hymn of the Republic to convey its message that the rich built their wealth at the expense of the downtrodden poor:

Is there aught we hold in common with the greedy parasite
Who would lash us into serfdom and would crush us with his might?
Is there anything left to us but organize and fight?
For the union makes us strong.

It is we who plowed the prairies; built the cities where they trade;
Dug the mines and built the workshops, endless miles of railroad laid
Now we stand outcast and starving midst the wonders we have made
But the union makes us strong.

They have taken untold millions that they never toiled to earn
But without our brain and muscle not a single wheel can turn
We can break their haughty power, gain our freedom when we learn
That the union makes us strong.

A century later, long after the disintegration of the IWW (The Wobblies), even after the collapse of the Soviet Empire and the near universal rejection of Marxist ideas of class struggle, political demagogues and prophets of pop culture continue to peddle the outrageous notion that the creation of wealth by one citizen inevitably leads to the impoverishment of his neighbors.

The hugely influential 1987 film Wall Street (the same melodrama that gave the world the indelible phrase greed is good) provided memorable expression to the notion that wealthy operators could only enrich themselves by denying benefits to others. Bud Fox, the aspiring trader played by Charlie Sheen asks his mentor Gordon Gekko (Michael Douglas) How much is enough? and the charismatic villain emblematically replies: It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another. Later, in one of his windy speeches (as scripted by Oliver Stone) Gekko helpfully explains the basis for economic inequality in America. “The richest one percent of this country owns half our nations wealth, five trillion dollars,” he declares.

One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bulls**t. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of that hat while everybody else sits out there wondering how the hell we did it. Now you’re not naive enough to think were living in a democracy, are you buddy? It’s the free market.

Inevitably, this old sense of a rigged game — of the arrogant, avaricious few abusing and oppressing the hard-working many plays a role in our politics and public debates. In his campaign for the presidency in 2000, Vice President Al Gore (the preppy, Harvard-trained son of an influential U.S. Senator), framed his struggle as a battle between the people and the powerful. In the next two election cycles (both 2004 and 2008), North Carolina Senator John Edwards campaigned for the presidency in a preposterously populist pose. Before the unwelcome attention on his private life, he became famous for an endlessly repeated stump speech that described the nation as painfully and utterly divided. Today, under George W. Bush, there are two Americans, not one, the blow-dried blowhard, multi-millionaire trial lawyer, solemnly intoned. One America that does the work, another America that reaps the reward. One America that pays the taxes, another America that gets the tax breaks. One America that will do anything to leave its children a better life, another America that never has to do a thing because its children are already set for life. One America that is struggling to get by, another America that can buy anything it wants, even a Congress and a President. (Des Moines, December 29, 2003). The two Americas theme unwittingly conformed to the message of the Little Red Songbook, with its emphasis on a working class and an employing class with nothing in common.

Senator Edwards’ economic and social analysis deserved no more respect and credibility than his marital vows, but countless commentators and candidates promote a similar view of our current economic situation. Lou Dobbs, the carefully-coiffed Cassandra of CNN, offered an apocalyptic bestseller in 2006 called War on the Middle Class. In its pages, this Harvard-educated resident of a 300-acre horse farm in Sussex County, New Jersey, declares that ours is becoming increasingly a divided society a society of haves and have-nots, educated and uneducated, rich and poor. The rich have gotten richer while working people have gotten poorer What was for almost two hundred years a government of the people has become a government of corporations. In my opinion we are on the verge of not only losing our government of the people, for the people and by the people, but also standing idly by while the American Dream becomes a national nightmare for all of us.

The laughably ludicrous proposition that elites wielded less power and enjoyed fewer unearned privileges in the eighteenth and nineteenth centuries, or that ordinary working people enjoyed more options and comforts two generations ago (in the depths of the Great Depression), demonstrate the toxic impact of the rich-get-richer/poor-get-poorer lie. The defense and promulgation of that lie requires outlandish claims about the levels of suffering and destitution in our peerlessly prosperous society. If the tremendous explosion of American wealth in recent years (slowed but not halted by todays downturn) somehow damaged the prospects and well-being of the nations poor, then poverty would be both more prevalent and more abject than in prior decades a proposition contradicted by all the evidence.

The claim that progress for the rich causes pain for the poor is logically impossible, historically unsupportable and culturally (and psychologically) unforgivable.

DOES WEALTH CAUSE POVERTY?

In his influential and eloquent 1981 bestseller Wealth and Poverty, George Gilder assailed the concept of material well-being as static and limited. This mode of thinking, prominent in foundation-funded reports, best selling economics texts, newspaper columns, and political platforms, is harmless enough on the surface, he wrote. But its deeper effect is to challenge the golden rule of capitalism, to pervert the relation between rich and poor, and to depict the system as a zero-sum game in which every gain for someone implies a loss for someone else, and wealth is seen once again to create poverty.

In addition to abundant records from past and present to disprove this cramped and pessimistic point of view, there’s the simpler perspective of personal experience and common sense. In 1996, my wife and I moved with our three children to Seattle and, like most denizens of the great North-wet, we took immediate pride in the world famous plutocrats who became our new neighbors. For a time, much-publicized lists of the nations wealthiest individuals showed four out of the top ten living in the Seattle area (thanks to spectacular success in the software and cell phone businesses). In all the years weve raised our family in Western Washington, weve never once heard a local resident express resentment over the fact that some of the richest people on the planet choose to live in our region. People might criticize Bill Gates for his public pronouncements, or register their complaints about the products he and his team unleash from Microsoft, but none of these skeptics ever expresses the wish that the billionaire would pack up his family and move to LA or London. In fact, the tens of thousands of boaters who ply their craft on Lake Washington love to cruise past the sprawling Gates mansion on its bluff in Medina, and point out the site to all visitors as a regional landmark.

The presence of unimaginably wealthy people enriches our area in both tangible and intangible terms. It’s not just the obvious addition to the tax base, or the lavish level of charitable giving with local museums, parklands, performing arts institutions, universities, sports stadiums and much more benefiting handsomely from the generosity of the Gates family, or of his idiosyncratic Microsoft co-founder, Paul Allen. Theres also an energy, a cosmopolitan atmosphere and a sense of world class swagger, that comes to any community thats able to spawn and retain some of the most productive and powerful entrepreneurs in existence. Far from swallowing up limited resources that would otherwise nourish the middle class and the poor, a citys most successful businessmen generate and contribute resources that benefit everyone. States that impose punishing tax rates that chase away their richest residents and most dynamic businesses do nothing to improve the lot of the less fortunate, as recent experiences in Michigan, Ohio, California and New Jersey dramatically demonstrate.

Here in Seattle, the 2001 decision by Boeing to move its corporate headquarters to Chicago (with special tax incentives and concessions from the pliant Illinois legislature) struck all segments of the populace as a disaster. The big aircraft company reassured Washingtonians that they had no plans to close down their major manufacturing facilities in our area, or to end their century-long association with the region, and that the strategic shift to the Midwest would cost only 500 executive jobs. Nevertheless, from Governor Gary Locke (now Secretary of Commerce in the Obama administration) to voluble cab drivers on the scenic streets of Seattle, everyone understood that the departure of top brass from a top international corporation darkened the future for every sort of enterprise. Governments and chambers of commerce aren’t crazy when they fight ferociously to keep prospering businesses where they are, or to lure new companies from other states. Under the logic of rich-get-richer/poor-get-poorer they should welcome plans by any local enterprise to relocate because that will leave behind more wealth for the working class. Fortunately, most people understand that if a corporation moves away it means fewer jobs and less productive activity in the local economy. It doesn’t take some leap of comprehension and logic to then reach the obvious conclusion that it’s also a blow if the business leaders who provide the jobs and generate productive activity decide to pursue profit somewhere else or even choose to retire to a gated beach resort.

THERE GOES THE NEIGHBORHOOD

If a prominent corporate executive decides to buy a new home on your block there’s little chance you’ll hear the comment there goes the neighborhood. The addition of a few well-off neighbors can raise property values and prestige for everyone else. When the guy next door begins making more money and goes through a major remodeling or stylish landscaping or even adds a second story, as long as he doesn’t block your view (which zoning should prevent) it’s reason for celebration, not resentment. When the prospering folks across the street get a new roof or a fresh paint job or decide to install a swimming pool, they’ve done nothing to damage your enjoyment of your own home. They may inspire other householders in the area to make their own improvements and, at the very worst, they’ve provided well-paid employment for contractors and gardeners and maybe even architects. An increase in wealth for one family never causes an increase in poverty for other houses on the block nor, for that matter, takes resources away from strangers on the other side of town.

If, on the other hand, an impoverished family occupies the house a few doors away, it’s only natural to worry about the future stability of the neighborhood. On occasion, such responses stem from racial prejudice which is both irrational and indecent. In many instances, however, it makes sense to feel concerned about a sudden influx of poor people into the immediate vicinity. The well-established, long-time residents might reasonably worry that a big wave of fresh arrivals could depress home prices, or place major demands on the community without bringing the new resources to help fulfill them. In this situation, the newcomers may ultimately surprise old timers with their unexpected energy, family values or hard work, but it’s still rare to hear any homeowner welcome poor neighbors because they’ll suddenly make him look and feel rich by comparison. No one wants to see the homes on the block become overcrowded and rundown, with peeling paint, unkempt yards and junked cars on cinderblocks on the front lawn, just so the prior residents can now claim to own the nicest remaining houses on the street. The dramatic changes in both deteriorating and gentrifying districts show that even non-related families generally rise or fall together, seeing whole neighborhoods improve or decline. New wealth brings more wealth, just as deepening poverty leads to more poverty. But increased riches for some don’t lead to deprivation for others, any more than impoverishment for some guarantees enhanced wealth for others.

THE POOR LIVE MOSTLY ON THE RICH

This economic interdependence becomes even more obvious in the workplace than in residential districts. Bosses and workers, the allegedly opposing castes endlessly invoked by class struggle rabble rousers, actually depend on the success of precisely the same companies. In the fierce competition of free markets, bosses gain nothing if a seething workforce feels short-changed and exploited, and the employees earn no long-term benefit if the company they serve starts losing money. It’s true that increased revenue wont necessarily bring higher wages (since a short-sighted boss might choose maximizing profits over improving living standards), but business success certainly increases the likelihood of better salaries (and bonuses). With all the fervent hostility of the smash-capitalism agitators of the last century, no theorist has been able to explain how damaging your own employer or striking out against the economic system in general will help you win a better deal at work.

The baleful experience of General Motors, once counted among the most dynamic and powerful of all US corporations, provides an instructive example. For several decades, the United Auto Workers secured contracts that meant that workers did better than the company that wrote their checks, but this imbalance brought an implacable reckoning. After the government bail-out (or takeover, to use the less delicate phrase) no one can mistake the reality that workers and bosses (and federal administrators) will either fail together or succeed together (especially since the union now owns the biggest share of the company). Even before bankruptcy and restructuring, it should have been obvious that employees would suffer if their company suffered, and would gain if their corporation gained. Any worker in any field who believes that hell benefit if the boss suffers business reverses is, quite simply, too stupid for continued employment.

THE INFAMOUS INCOME GAP VERSUS PROGRESS FOR THE POOR

Unable to muster any sort of logical support for their attempt to associate soaring prosperity for the most fortunate with deepening poverty for the least fortunate, inequality obsessives resort to the manipulation of data and history. While no studies in the last generation show the poor actually getting poorer, there is abundant indication of a growing wealth gap between those at the top and the bottom of the income scale. As the rich get richer, the poor also get richer dramatically richer — but redistributionists express horror at the fact that the distance between the least and most successful continues to increase.

In a typical jeremiad from the Age of Reagan (September 7, 1986), Barbara Ehrenreich posed a painful question in the New York Times Magazine under the headline, Is the Middle Class Doomed? She reported that some economists have predicted that the middle class will disappear altogether, leaving the country torn, like many third world countries, between an affluent minority and throngs of the desperately poor. Some twenty years later, Lou Dobbs made a strikingly similar prediction in his book War on the Middle Class, suggesting that doom was in fact on hand for the Great American Bourgeoisie: Our political, business, and academic elites are waging an outright war on Americans, and I doubt the middle class can survive the continued assault by forces unleashed over the past five years if they go on unchecked.

As Arthur Laffer, Stephen Moore and Peter Tanous make clear in their hugely important book The End of Prosperity (2008), reports of middle class doom and demise have been greatly exaggerated. Heres the truth, they write. The purchasing power of the median income family, that is, families at the midpoint of the income continuum, rose to $54,061 in 2004, an $8,228 real increase since 1980. The middle class is not disappearing it is getting richer.

In fact, the entire nation has gotten richer, very much including the poor. Americas net worth increased in real, constant dollar terms from $25 trillion in 1980 to $57 trillion in 2007. As Laffer, Moore and Tanous note, more wealth was created in the United States over the past twenty five years than in the previous two hundred years. In 1967 only one in 25 families earned an income of $100,000 or more in real income (in 2004 dollars), whereas now, almost one in four families do.

All evidence of a rising income gap reflects spectacularly increased wealth for the most prosperous rather than any falling living standards for the poor, and even this famous gap itself represents something of a statistical anomaly. A recent study by the Congressional Budget Office (May, 2007) showed that from 1994 to 2004 the poorest Americans enjoyed the highest increase in incomes. In other words, far from being left behind, the least privileged Americans are making faster progress than any other segment of the population. A subsequent report by the Treasury Department (Income Mobility in the U.S. from 1996 to 2005; November 13, 2007) reached the same conclusions, with those in the bottom 20% of wage earners improving their income by a breathtaking 109% (inflation adjusted). The Nobel Prize-winning economic historian Robert Fogel observed in 2004: In every measure that we have bearing on the standard of living the gains of the lower classes have been far grater than those experienced by the population on a whole.

With this sort of encouraging progress for the least prosperous Americans, how could the wealth gap possibly increase? The answer involves a statistical anomaly, and the contradiction between government figures measuring income rise in percentage terms, and numbers that report the rich-and-poor gap in raw dollars.

Imagine two citizens, the well-to-do Smith and the struggling Jones. Smith earns $200,000 a year and increases his income by an impressive 10%. Jones, on the other hand, brings home only $20,000 a year but succeeds in raising his earnings by a spectacular 20%. That means Jones receives $24,000 the next year while Smith gets $220,000.

In other words, even though the poor, hard-working Jones has lifted his earnings twice as fast as the wealthy Smith, the income gap between them has still increased from $180,000 to $196,000. Because Jones starts from a much lower base income, even a far more rapid improvement cant stop the expansion of the overall earnings differential.

By focusing almost exclusively on the disparity between those who earn most and those who earn the least, rather than reporting on the remarkable progress in income and living standards for even the poorest among us, major media distort and exaggerate the problems of poverty and inequality. As David R. Henderson of the Hoover Institution at Stanford University suggests, because of the problems with measuring income and adjusting for inflation, theres a better way to measure the wellbeing of a household: see whats in the house.

Robert Rector of the Heritage Foundation did just that in an important paper in August, 2007, using detailed and authoritative government figures. According to this research, among the 37 million Americans officially classified as living below the poverty line, 97% own color televisions, more than 50% own two or more color TVs. Seventy-eight percent have a VCR or a DVD player, and 62 percent receive cable or satellite TV reception. Eighty percent of poor households boast air-conditioning, 89% have microwave ovens, and nearly three quarters own a car. An impressive 31% drive two or more cars.

DAMAGING OTHERS BY EARNING MORE?

This insight puts the proper perspective on the common complaints about the unfair distribution of income and the demand that our political leaders do something to correct it. This pressure seems to presume that all income flows to some centralized authority, where all-powerful potentates decide precisely how they should hand it out. Even in the Obama Era, with the federal government ambitiously assuming a broad array of unprecedented functions, theres been no effort (so far) to establish a Department of Income Allocation. As William L. Anderson of the Mises Institute writes in The Income Inequality Hoax: Income is not something that just randomly flows into an economy. It is the result of individuals providing productive services that are purchased in a marketplace.

If someone takes home more than his neighbor, it’s not because he’s exerted more influence on the powerful people who dispense societys goodies to one and all, but because his employer has freely agreed to higher payment for the services that the fortunate earner has freely agreed to perform.

Yet even if theres nothing inherently unjust about different people earning very different salaries for the very different work they perform, many social critics worry about the wounding psychological impact of income inequality. An individual may feel small, frustrated, vulnerable and ashamed if he’s regularly reminded that he makes vastly less than other people at the same company or in the same neighborhood. According to this argument, self-esteem may suffer an even more substantial blow if the struggling worker believes his own low salary is justified.

An extreme example of such logic came in a bizarre 2005 international bestseller by Richard Layard, a member of the British House of Lords. In Happiness: Lessons from a New Science, Lord Layard draws some spectacularly unscientific conclusions. Over the last 50 years, we in the west have enjoyed unparalleled economic growth, he allows. We have better homes, cars, holidays, jobs, education, and above all, health. But are we happier? Not in the least, and this worried me. Economics is all to do with growth and national prosperity. But whats the point of more cash in the pockets if people are more miserable?

To discourage those who work harder and earn more, increasing pressure and resentment from the populace at large, Lord Layard recommends punitive taxes like those we use to decrease consumption of tobacco. If we make taxes commensurate to the damage that an individual does to others when he earns more, then he will only work harder if there is a true net benefit to society as a whole. It is efficient to discourage work effort that makes society worse off, he writes.

Arthur Brooks of the American Enterprise Institute scoffs at the notion of a special tax to suppress hard work and productivity and notes the utter lack of evidence that income disparities produce unhappiness or self pity. As he writes in the Wall Street Journal (July 19, 2007): The evidence reveals that it is not economic inequality that frustrates Americans. It is a perceived lack of opportunity. To focus our policies on inequality, instead of opportunity, is to make a serious error one that will worsen the very problem that we seek to solve and make us generally unhappier.

In his book, Gross National Happiness, Brooks tartly observes that policymakers and economists rarely denounce the scandal of inequality in work effort, creativity, talent, or enthusiasm. We almost never hear about the outrage that is America’s inequality in time with friends, love, faith, or fun even though these are things most of us care about more than we do money. To believe that we truly redress inequality in our society by moving cash around is to take a materialistic and totally unrealistic view of life. To focus on income redistribution is to profess a mechanistic and impoverished understanding of the resources Americans truly value.