There Is No 1%

In a recent interview, the New York Times sat down with businessman Edward Conrad to discuss the merits of the American economic system. Conrad, a former employee at Bain Capital, friend of Mitt Romney, and author of the upcoming book "Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong," came out swinging with a powerful defense of the United States' capitalist economy and the so-called 1%.

Conrad must be given credit for both a sound economic defense of the American system and for unabashedly standing up to the onslaught against the core economic principles that have defined the United States for generations. In a financial and economic discussion that is defended as "genuinely fantastic" even by prestigious leftist economists, Conrad outlines how the accumulation of wealth allows investment that proportionally helps everyone.

Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works — that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone....Conard concludes that for every dollar an investor gets, the public reaps up to $20 in value. This is crucial to his argument: he thinks it proves that we should all appreciate the vast wealth of others more, because we’re benefiting, proportionally, from it.

Essentially, he argues that, despite much opposing popular sentiment, there is not anything wrong with the perceived wealth gap in the United States. In fact, it seems he argues the opposite.

A central problem with the U.S. economy, he [argues], is finding a way to get more people to look for solutions despite these terrible odds of success. Conard’s solution is simple. Society benefits if the successful risk takers get a lot of money.

While to the interviewer's chagrin, Conrad does not delve into some serious counterarguments, such as rent-seeking, his economic arguments are sound and convincing. If one buys his logic, as is hard not to do, the Occupy Wall Street crowd are simply fools who are naively injuring themselves.

Nevertheless, Conrad's argument implicitly accepts leftist (socialistic) assumptions through his defense of the so-called 1% by highlighting their provision of a social good. He attempts to refute the charge that the high income and wealth of the rich is somehow denying the poor of what they are due. However, despite the clearness of this analysis, he is making the wrong argument. He is battling the left (and the populist right) on their battleground—generally a woeful proposition—by accepting two significant, albeit it wrong, assumptions.

First, his argument accepts that the divide between the 99% and 1% is real, that there is some fundamental gap that separates the two groups. But such a contention is insupportable. What separates, for instance, the 2% from the 1%? Is everyone in the 99% in the same position? How about the 1%? The truth is that this divide is arbitrary, as any sensible person would acknowledge. It ignores myriad nuances—costs-of-living, family-size, personal goals, type of career, and others.

But the divide has powerful political ramifications, which is precisely why promoters of class warfare have seized upon it. It mobilizes people into an us versus them mentality, attempting to create an artificial camaraderie between the vast majority of Americans—an in-group—against some undeserving out-group. Worst of all, it ignores one of the founding principles of this country that all Americans are equal under the law. There is no 1% or 99%, but simply 100%, each trying to live their own life according to their own abilities, goals, and luck.

Second, by expounding these economic benefits Conrad is accepting the argument that in order for certain members of society to be able to justify high incomes or accumulated wealth, they need to be providing a social benefit. In other words, Conrad's formulation is identical to that of the far-left—individual success, at least for the wealthy, is only justified if the rest of society gains from their behavior. The flip-side implies that if high-income earners cannot convincingly highlight a social good, then their income is somehow illegitimate and possibly forfeit. Conrad only differs from the OWS thugs insofar as he believes that high-income provides such a social good, while those in Zuccotti Park do not.

But this argument is untrue and unjust. Individuals are entitled to the rewards of their work simply because they have been deemed valuable enough by the efforts and their employers to be compensated accordingly. No one, whether wealthy, poor, or middle-class, has to justify their compensation in any social context. Society seems to accept this logic for all but the rich. Very few people feel the need to justify their salary by citing a greater social good. Most feel entitled (and rightly so) to their income based on the hard work they put into their jobs. However, at some arbitrary point a sort of jealousy kicks in creating a scenario where certain Americans have to justify their incomes according to different standards.

This is profoundly un-American. A banker has no greater moral responsibility to justify a social benefit of his salary than a shopkeeper or mechanic. Every American is entitled to reap the rewards that come his way, in whatever form he desires. No one else has a claim to his income and no one else should arbitrarily define criteria to judge whether such wealth is deserved or not. To do otherwise opens a dangerous arena for improper abuse by the majority against the minority.

Redefining Poverty

There is a problem of definitions in American politics.  Although not a new phenomenon, it is unfortunately one that is rarely discussed.  In many instances, challenging the accepted political definition of certain words leads to harsh, acerbic, and often unwarranted attacks by those who wish to defend a political definition for their own partisan uses.

In a recent report, the Heritage Foundation has courageously taken a stand against the definition of one of these words - "Poverty".  The abstract to the full report states the following:

For decades, the U.S. Census Bureau has reported that over 30 million Americans were living in “poverty,” but the bureau’s definition of poverty differs widely from that held by most Americans. In fact, other government surveys show that most of the persons whom the government defines as “in poverty” are not poor in any ordinary sense of the term. The overwhelming majority of the poor have air conditioning, cable TV, and a host of other modern amenities. They are well housed, have an adequate and reasonably steady supply of food, and have met their other basic needs, including medical care. Some poor Americans do experience significant hardships, including temporary food shortages or inadequate housing, but these individuals are a minority within the overall poverty population. Poverty remains an issue of serious social concern, but accurate information about that problem is essential in crafting wise public policy. Exaggeration and misinformation about poverty obscure the nature, extent, and causes of real material deprivation, thereby hampering the development of well-targeted, effective programs to reduce the problem.

The report continues by discussing the standard of living experienced by most "poor" Americans and how high these are, both in historical comparisons and vis-à-vis other countries.  It makes the key argument that there is a need to separate the truly destitute (eg. those that chronically lack shelter, food, or clothing) from those that are just defined as poor.  Due to limited resources, this expansive definition of poverty has not only injured the truly destitute but provided for those that are arguably not needy.

The U.S. Census Bureau, which determines the poverty thresholds, bases their calculation of these thresholds on a 1963 study that looked at the Department of Agriculture's low cost food plan.  Surprisingly, it was not designed to reflect the daily needs of an individual or family.  "...[They] did not develop the poverty thresholds as a standard budget... a list of goods and services that a family of a specified size and composition would need to live at a designated level of well being." 

While the Census Bureau's "poverty thresholds" are only used for statistical purposes, the Department of Health and Human Services (HHS) further complicates issues by setting forth "poverty guidelines" for administrative purposes.  While these are generally based on the Census Bureau's numbers they are modified for various programs (for instance scaled up by some percentage).  These guidelines are what are used in most welfare programs.

Arguably both the Census Bureau's and HHS's definitions are exceedingly arbitrary.  As the Heritage report empirically supports, far too many are able to achieve substantial luxuries while nevertheless being deemed poor by the government.

A secondary source of definitional challenge comes from politicians who often use the term "poverty" in a relative sense.  A relative definition of poverty signifies that poverty is determined by some distance from a measure of "middle-class" - for instance the median income. This necessarily implies that the problem of poverty can never be solved, unless all incomes become very narrowly distributed around a median income.  Taken to its logical conclusion, in some perverse world, poverty could easily be eradicated by evaporating the wealth of the richest in a country without any concomitant change in the position of the poorest. By thus diminishing the "wealth gap," relative poverty would no longer exist. Obviously such a precept is laughable - no state would be better off by removing wealth from society - but it nevertheless is the natural conclusion of a doctrine of relative poverty.  In reality, "relative poverty" is nothing but a euphemism for "income inequality."

Instead, poverty should be measured in relation to what a person needs to achieve certain necessities, such as food, shelter, and clothing. By using an such an absolute measure, poverty is defined by essential characteristics not an arbitrary statistical formulation or relative comparison. This is undoubtedly a more just definition of poverty and puts the state in a better position to provide resources to alleviate poverty. It also provides proponents of the welfare state with a better position from which to defend the need for state assistance in eradicating poverty.

[By claiming the American definition of poverty is wrong, one does not mean there are not people who truly are in need, nor that there are not those who are truly poor in America.  But it does imply that a changed definition can have significant implications for welfare policies.]

It is to be expected that vested interests will attempt to avoid any discussion, let alone any changes to the definition of poverty.  Expansive definitions of poverty allow numerous constituents (particularly but not exclusively of the Democrats) to gain benefits at the expense of others.  It is unlikely that recipients of handouts (whether low- or high-income) will be willingly to abdicate their lucrative positions.  This is unfortunate and unfair.  In such times of economic difficulty and budgetary disorder it is necessary to carefully study if our current definitions and resulting policies have stepped beyond what is appropriate and into the realm of social and economic largess.

Arguably, much of our welfare state has become a system of wealth redistribution rather than a social safety net.  This is not so much a critique of the concept of the welfare state but of its abuse to fulfill abstract notions of social justice.  As Heritage points out, our working definition of poverty has become one much more about "income 'inequality'" than one of need.  This has arguably caused the state to venture far outside of its appropriate bounds and has indubitably contributed to our expanding fiscal woes.  According to the authors of the study, "President Obama plans to make this situation worse by creating a new 'poverty' measure that deliberately severs all connection between 'poverty' and actual deprivation... giving the President public relations ammunition for his 'spread-the-wealth' agenda."  A redefinition of "poverty" to more accurately reflect individuals' needs may not only help alleviate America's budgetary problems but allow a misappropriation of the system to revert to its moral underpinnings.

Class Warfare and the Social Yard-Stick

Class warfare is becoming a full-blown storm on Capitol Hill. It is not really anything new – a time-tested strategy frequently relied upon by the left, but also used by the right. President Obama’s latest deployment was during his announcement of the bipartisan tax deal with Republicans.

Presumably, such a cross-aisle deal is a time to rejoice at actually finding middle ground in the exceedingly divisive Congress. Instead, the “class card” was thrown about. Obama likened the deal to one made with hostage-takers [Can a deal really be enforceable if made under duress?!]. He stated, “I’ve said before that I felt that the middle-class tax cuts were being held hostage to the high-end tax cuts. I think it’s tempting not to negotiate with hostage-takers, unless the hostage gets harmed.”

Now, the merits of Republican tactics aside, the interesting issue is the continued desire of American politicians, particularly on the left, to sow the seeds of class warfare. The storyline is familiar – greedy fat cat CEOs, those over $250k not “paying their fair share,” and “tax-cuts for the rich.” Republicans feed right into this game, defending the economics of high salaries and bonuses (needed to incentivize performance), arguing for low tax rates (high rates stifle economic growth), claiming that some “rich” just really are not all that rich, and pointing to all the good that some wealthy do for the community.

All of this is probably true and these arguments need to be made. However, they miss the fundamental point and allow the political game to be dictated on far-left terms. The left loves class warfare. It plays into a multitude of arguments defending wealth redistribution and increased government involvement in the lives of private citizens. But it rests on a fundamental misunderstanding of what income’s purpose is.

The left looks at income as a sort of social yard-stick, a tool to measure one’s value to society. By this logic the more one makes, the more good they should bring. However the argument goes, there is quite a bit of injustice in the system! Greedy CEOs do not help the country and yet they get rich, while struggling laborers barely make ends meet! The natural solution? Take from those who undeservingly make a lot of money and give to those who deserve it, but do not get it.

Implicit in this argument are at least two assumptions. The first is the particular standard regarding who deserves what. The left has come up with some arbitrary criteria of what is “deserving” and thus how wealth needs to be redistributed. Enter the Republicans – who try to challenge the left’s definition of “deserving.” This is where the class warfare is generally fought. Republicans, for instance, argue that CEOs, for better or worse, do deserve at least some of their recompense.

However, by playing the game of “what social value do [insert: CEOs, top 5% of income earners, those who make over $250k, etc] have,” Republicans are tacitly acknowledging the deeper assumption in this leftist [daresay socialist] argument – that there is even a relationship between social value and income.

The fact of the matter is that income is a measure of one’s services in a given line of work. It is the market’s determination of what value an individual provides for a certain occupation. Income, like the price of nearly every other good, is motivated by a host of factors, including, of course, supply and demand.

However, it is not – and should never be – a measure of one’s value to society. This is too arbitrary of a claim. Society – government in particular – has no right to pass judgment on an individual’s value or their associated income. [Beyond the issue of right – government simply has no, non-arbitrary means to determine value outside of the market-mechanism.] The rich are no more or less deserving of their wealth, than the poor are of their dearth. “Deserving” just simply is not a concept that the government is fit to act upon.

It is time to cut the class warfare. It is far too divisive and harmful for our country. Not only does it lead to strife between individuals and groups, but it creates an environment where the government feels even more compelled to meddle in the private affairs of citizens. One may not like that someone else makes more than him, but that never justifies arbitrarily taking it from him. Why should it be any different for the government?