“Defending the Rich” an essay by Pat Slattery

Today’s Guest Saturday post comes to us from Pat Slattery of The Free Market Project blog. It was originally published on April 20, 2012.

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Defending the Rich

A Poor Man Never Gave Me a Job

This is a truism. It’s important that people begin to understand the implications of this statement. The rich, wealthy individuals, or successful companies, drive the economy. Harming them in the name of “fairness” is a recipe for a declining economy, less opportunity, and ultimately poverty for a large number of people.

Investment

Say I’m a middle class guy (which I am) and I have an idea for a product or service. “Go to the bank! Get a loan!” people will advise. There are two aspects of this that most people don’t seem to think about.

The first is that the money that the bank has to loan is the savings of people… people with money! The wealthy or well-off. Sure, some people who are not wealthy have savings, but that doesn’t amount to a lot usually. Most of us have our checking accounts where money is going in, and coming back out before the end of the month in roughly equal amounts. The big savings that allows people of lesser means to take loans from banks comes from people who have large savings accounts–the rich.

Second, when you walk into a bank to ask for a loan to start or expand a business, you need collateral. You are putting your personal assets on the line for the loan. If you don’t have enough collateral, or the guy reading your business plan doesn’t understand the vision and potential behind your product or service, you’re not getting a loan.

So if you get the loan, what you’re getting is a loan of money from people better off than you, ultimately. The dreaded rich, for example. If the money that the rich person would have saved is, instead, going to taxes for the government to spend, that’s bad news for you. The bank has no money to loan.

If you don’t get your loan, where do you turn?

You can only turn to people who have what we call “risk capital” available… The rich. Look at the story of Apple Computer, for example. Steve Jobs and Steve Wozniak had this great little product and a great vision. They created it in Jobs’ parents’ (middle class family) garage. Unless they met Mike Markula, who had risk capital available to fund the project, they would have been dead in the water.

It is the people with extra money lying around and who have a desire to expand that wealth who invest in risky ventures. They risk the money knowing that they could easily lose it all, but they can afford it. They can afford it because at some point in their lives they made a lot of money working for it, and with the success of other investments. These people know that they are going to lose money most of the time (using their knowledge or their vision as the only guide to reducing that risk), but they also know that if an investment hits, it could hit big! That washes out other losses.

You simply cannot go to people with no risk capital available and ask them to invest in your new venture. They either don’t have the money (literally, as they are living paycheck to paycheck) or their savings is too small and precious to them to risk it. Not to mention the SEC regulations that “protect” people from making risky investments (I have to read the new law just passed to see what that’s done to enable people who are not “qualified investors”–people with over a million dollars in liquid assets–to take risks that might provide big rewards).

It is the rich who fund new opportunities, taking the risks financially as the entrepreneur takes the risk with their ideas and vision.

In terms of a rich person providing jobs, here we’re also talking about people who are already successful hiring new employees as their businesses expand. A struggling business isn’t hiring. Someone losing money isn’t hiring. Only the successful–the rich, or the on-their-way-to-rich, are hiring.

What about other jobs? Does a poor person hire someone to paint their house, or do their yard work, or even tackle a plumbing problem? No. They do it themselves if they can afford to do it at all. The people who make their livings taking care of other people’s property do so only because of people who have accumulated enough wealth so that they don’t have to do those things themselves. A poor person isn’t even going to give a kid a job mowing his lawn.

The Great Market Makers

When any product idea is new, there aren’t economies of scale that bring prices down so that the average person, or even the poor, can afford them. The first market for emerging technologies is the rich. This was true for the flush toilet, and it’s true for cell phones and flat screen TVs. One of my favorite examples of this is the original DVD-type player, the laser disk, where movies were put on a (usually gold in color) disk the size of a vinyl record. Nobody could afford that unless they were rich. The technology actually failed, as the manufacturers saw there could be a market, but they needed a less expensive, less cumbersome, technology. You don’t find old, unused laser disk players in the attics of poor and middle class people. It was the rich who spent the money on the new technology (ultimately wasted money), which ultimately enabled manufacturers to improve the technology and bring the price down with economies of scale.

Same story with flat screen TVs and cell phones. Who, but the well-off were carrying around huge bricks they could make phone calls on, or having big phones installed in their cars, and paying outrageous fees per minute for the convenience of making a phone call wherever they happened to be? The signal had to be bad, because there weren’t many towers. But it was those well off people making those purchases that identified the market and enabled manufacturers and service providers to both see the potential and afford the expansion, through economies of scale, that got us to the point where it seems everyone, even the poor, can have a cell phone. It may not be an iPhone, but a low-cost, prepaid phone purchased at Walmart can serve the purpose. That would not have been possible if the rich weren’t the early adopters and advocates of the technology.

Indoor plumbing, HVAC, all manner of recreational and leisure products… The story is the same. The rich consume the products, even the “destined-to-fail” products, and provide the manufacturers with the means and knowledge to expand production with economies of scale to bring the prices down so that everyone can eventually afford the products. Look at the stats of HVAC, bathrooms, TVs, microwaves, computers, phones, etc. in “poor” peoples’ homes if you don’t believe me. Most of the poor at the beginning of the 21st century live with many more conveniences than the rich at the beginning of the 20th.

Carrying the Burden

The Democrat meme about the rich “not paying their fair share” is simply a falsehood. Forget that they never define “fair,” which is done on purpose so that they can simply demagogue the issue. Anyone with any sense of fairness looks at the top 1% of earners paying 38% of the taxes (I heard yesterday that the preliminary new data on that is that the top 1% most recently has paid 44% of the taxes), and the top 5% paying almost 60% of the taxes (I didn’t hear the preliminary new data on this, but obviously it’s gone up too) and they can’t say those people aren’t paying their fair share. This is especially true when you look at the percentage of income made by those groups, which generally works out to about half of the percentage they pay in taxes (the top 1% of earners make 19% of the income, for example).

Any way you slice the numbers, the rich pay a disproportionately large share of the taxes. They try to fool us with idiocy like saying that Mitt Romney had an effective tax rate of 15% (or was it 14%… I forget), never mentioning that it is all dividend income which is taxed twice, once at the corporate level (where profits–the only thing that can be paid out as dividends–are taxed at a world-leading rate of 35%) and again when it hits Mitt’s pocket at 15%, giving the treasury an overall tax rate on the money Mitt Romney puts in his wallet of 50%. And this is to say nothing of the benefit to the economy via the growth of the company (the jobs it provides, the ancillary jobs created for people in other businesses that do business with that company, etc.) of Mitt’s investment in the first place.

The other burden the rich carry is charitable giving (unless you’re a Democrat, particularly a wealthy Democrat politician, which makes you far less likely to charitable with your money, statistically speaking). Do poor people give charities endowments? Many people with lesser means are extremely generous, even foolishly generous. But, even when they’re generous beyond what they logically should be, do you think it is the money of the poor and lower middle class that provides funding for charities and community projects? I don’t know about your community, but in my community it is the successful business people and successful businesses that provide damned near all of the funding for every community project and charity. And these are the people who are already paying the highest tax rates (property taxes, state, and federal taxes).

Summary

The savings, spending, and investment of the wealthy people in this country makes the economy go and grow. It’s really that simple.

Most people don’t get wealthy by accident. We don’t live in a society where some relative, somewhere back in time was deemed a duke or earl by a king or queen and was able to amass great wealth on the backs of the peasants. The leftists want us to believe that’s the case, but it simply isn’t.

In the USA, even if you have inherited money, someone, at some point in your family’s history, figured out a way to earn it. Even if you inherited it, you have to save it, spend it, or invest it, which is helpful to the overall economy. Most people who are wealthy are newly wealthy. The top 1%, or even the top 5% or top 20% are not a fixed group. As Thomas Sowell points out, if you look at individuals over time, there is a lot of movement to and from the higher income groups. It is only when you look at the static percentages that you can be fooled into believing that the same people (or families) are always at the top and always at the bottom. The leftists want us to think that way, but the reality is very different. Wealth is still something that can be attained from anywhere along the spectrum. Losing family wealth is also a real possibility, and, in fact, unless money is shepherded in ways where that money continues to contribute to the overall economy through savings and investment (and spending) losing it is a probability, not a possibility.

Becoming rich is still something that we should, if we are so inclined, aspire to. It is not an evil. It should not be demonized. The rich make a tremendous contribution to the nation, not merely in the taxes they pay, but by using their resources to build more wealth and prosperity. It doesn’t trickle down, it flows down. A rising tide does lift all boats. Wealthy people spending their money creates jobs and prosperity for someone else. Wealthy people saving their money provides the money banks can loan to others to fulfill their dreams. Investment in risky ventures by the wealthy (the only group who can afford the risk) provides us with new products and services, and new jobs… New opportunities to become wealthy ourselves so that we can make the same kinds of contributions other rich people make.

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8 thoughts on ““Defending the Rich” an essay by Pat Slattery

  1. The wealth gap in the United States is very real. The top 2% earn about 24% of all income earned in this country. That is very high.

    The people earning that 24% are entitled to their earnings. That is not at issue.

    The problem is that they earn so much that they can’t spend it and return that wealth back into the economy to grow it for the future. Effectively it removes 24% of demand from the economy.

    What should not be allowed is big government playing Robin Hood to steal from the rich to give to the poor.

    That would be the worse possible outcome for solving the wealth gap problem.

    1. Why would there not be a wealth gap in any free society with property rights? There will always be thousands of people who can make a living working for Verizon or ATT selling iPhones, but only one Steve Jobs. The Steve Jobs types, and those with the smarts to invest in him, will always be paid extraordinarily disproportionately compared to all of the people who wouldn’t have jobs at all if it wasn’t for him.

      I love the example of a football team. Tom Brady makes something like $15 million per year. The kid who passes out the Gatorade and the Towels might make a few thousand. Why the disparity in income? There is one Tom Brady, who can bring fans to the stadium, win football games, and increase the value of the franchise by enough to justify his compensation. On any given Sunday, there are 60,000 people sitting in the stands who could easily replace the guy passing out the Gatorade and towels, but on that same Sunday, there is only one guy in the stadium that can do what Brady does, and even the other team is lucky if they have someone comparable to him.

      The best we can do, I’d think, is to encourage the rich to be spending, saving, and best of all, investing. That is what gives more opportunity to find more Steve Jobs types waiting to contribute new ideas and products to society.

      I have a secret, totalitarian idea I’ll share… Instead of taxing the rich more, I’d force them to take 10% of their earnings and become investment angels for start-ups with that money (either on their own, or in a consortium of others). FORCE the investment, but keep it private… no government telling anyone what they can invest in. Let entrepreneurs woo the angels (or their representatives). Let the angels profit when the investment is successful, and write off the loss when it isn’t. I know… totalitarian as hell, but at least it would force investment, be kept private, and contribute to creating new businesses.

  2. Starts with a false premise: “A Poor Man Never Gave Me a Job
    This is a truism…The rich, wealthy individuals, or successful companies, drive the economy” Poor people give people jobs all the time. Thousands of lottery workers, payday loan shops, car title loan shops, and slum lords are employed by poor people.

    The economy is not driven by rich people. They don’t have enough money. The economy is driven by groups of people collectively buying large quantities of goods and services.

    Taxing the rich won’t solve our problems; they don’t have enough money. But this “the rich drive the economy” is a canard that needs to stop. We need more money to pay down our debt, and taxing the poor more is unjust. Taxing the middle class more is the only option, and taxing the rich more will make that necessary step less damaging. But none of it…NONE OF IT…without major cuts in spending.

    (Sorry if this is a dupe. Other one didn’t show after login. This version is more accurate anyway. 🙂 )

    1. I didn’t say poor people couldn’t be customers, and help keep people employed, but the poor people aren’t the folks that opened the payday loan shops, car title loan shops, or own the buildings. I’m not talking about customers, I’m talking about ownership, which requires savings and investment to create the businesses that serve the consumers. Obviously, the economy needs the consumers, which come from everywhere along the income scale.

  3. But you don’t have to be rich to open such businesses, or to sustain them. Ownership of major corporations is mostly to middle class people with pensions and 401(k)s and mutual funds. Starting a business doesn’t necessarily require a great deal of money; just a good business plan, good credit, and some skin in the game; middle class people again.

    No one is going to not get rich because the taxes are too high. This “punishing success” idea is foolish. I’ll gladly take a $500k/year income with 50% taxes rather than $100k/year income with 15% taxes.

  4. No is going to not get rich because there are rich, either. . Obama makes it sound like the rich are draining opportunity from the middle class which is NUTS.
    I’m 100% for corporations…the author says it well…what poor person do we know who’s hired anyone? We need to close some loopholes and I think Romney will be interested in doing that. Obama’s done little about that, right? All Obama’s done is pretty much smash the American dream of making all the money you can possibly make; success was the dream of every American. Now, we’ll be taxed so badly that success is scary!
    We do need major MAJOR cuts in spending but nobody’s going to get elected by saying “We’re taking your goodies way”, you all know that. But, Obama will make that the keystone of his campaign.

    1. Supply and demand from consumers creates jobs. Even when corporations rape small towns and close up shops all they are doing is taking responsibility of those positions to be filled. Without the consumers, supply, and demand there would be no position at all. The insanely rich and mega corporations actually eliminate job growth by using automation and overseas labor to increase their profits while small businesses at least don’t have the capital to afford such amenities and use good old fashioned elbow grease. Actually the only jobs the “rich” can create are menial tasks such as paying a person to stand in the rain, flip over rocks so they don’t get sunburn on one side, or maybe run around in circles for no apparent reason. Yet a person would still do it for the simple reason of being paid so they can be a consumer and drive the economy. I just can’t fathom why so many working stiffs felate the “rich” and expect them to do things from the kindness of their heart. It’s up there high on the list of fruitless welfare with prayer.

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