I’ve always been interested in economics. I wanted to understand how the economy works, what makes it better and what makes it worse. I tried reading Milton Friedman’s highly recommended book on economics, Capitalism and Freedom. It was a little too technical and I ended up more confused that educated.
Then I heard about Popular Economics by John Tamny. I downloaded the free Sample (Introduction and first chapter) from Amazon on my Kindle. It is easy to read and understand. The author uses entertaining stories from sports, movies, popular culture, and famous businesses to explain basic economic principles. I highly recommend it.
A few chapters into the book, I found something interesting. Most people seem to believe that a person who has a lot of money is keeping it from others who need it.
My thoughts were that rich people can only do four things with their money.
- Spend it.
- Save it.
- Invest it.
- Give it away.
It is easy to see that number four, give it away, is going to help the less fortunate. Even if the rich person gets a tax credit for giving to charity, more of the money would probably get to the needy. If collected as taxes, the money goes through layers of bureaucracy, each layer skimming money off the top to pay for the bureaucracy, leaving less to help the less fortunate.
Back to number one. When rich people spend their money and they have a lot to spend, it creates jobs for the people that make the product or provide the service. I think we can all agree that supporting existing jobs by buying stuff is important and a benefit to the economy.
Number two – save it. The days of wealthy misers keeping their money in a mattress and taking it out every day to count it are long gone. Nor do they have bundles of $100 bills in a safe deposit box. They put it in an interest bearing savings account or certificates of deposit. Even with the low interest rates being paid on savings accounts, if you put $10 million in a savings account, you are going to make something substantial back.
And what does the bank do with the money they are paying you to keep in their bank? They are loaning it out to other people at a higher interest rate in the form of personal loans (auto, appliance, etc.), mortgages and small business loans. Each of these applications creates jobs whether it is building the car, the refrigerator or the house. Or it could be a loan to small businesses to improve or expand their business which creates jobs.
Number four – invest it. This seems to be the most evil thing rich people do with their money. Somehow it is wrong to make more money without really working for it. Today, they (the rich) can sit at home in their underwear and buy and sell stocks and make big money. Just doesn’t seem right. All of that aside, what happens to the money the rich invest? If they buy stocks, the company they invest in uses the money to expand their company, hire more employees and do research to improve or development new products.
The rich also invest in other ways besides the stock market. Like directly investing in a company as a partner, or providing funds for start-up companies. Steve Jobs and Steve Wozniak started Apple Computer Company in the garage of Job’s parent’s house. If they hadn’t received start-up money from a wealthy investor, Apple Computer might have failed and Steve Jobs may have returned to Atari designing circuit boards. How much different would the world be today without the iPhone, iPad and iPod? How many jobs today exist due to that investment of start-up money?
A quick thought about investing. People invest in a product/company because they think there is a demand for it, it will sell, and it will make them money. Government invests in companies/industries in the form of loans, grants or tax breaks, usually for touchy, feely reasons like it’s good for the environment, not because there’s a demand for it. How did the government’s investment in green energy and electric cars work out? Bankrupt companies and billions of tax dollars wasted because there was no demand. The government should stay out of investing. Should they have invested in companies that make buggy whips or manual typewriters to keep them afloat?
Back to the subject at hand. So it seems pretty self-evident to me that the rich having more money than me is not a bad thing. They don’t sit on stacks of money or burn bundles of it in their fireplace like Scrooge McDuck. The rich having the money to invest is what drives our economy.
Compare how our economy works to say, the former Soviet Union. The only rich in the USSR were high paid government officials. Government owned all industry. Failing industries were propped up by the government. There was no investment capital for small shop owners. No investment capital for inventors or entrepreneurs. How’d that work out for them?
The government interferes with our economic process by excessive taxation. Some taxation is necessary to support the military, necessary government agencies and “some” assistance programs. But as we have seen in the failure of the War on Poverty, government sanctioned wealth re-distribution doesn’t work.
If that money taken as taxes and doled out to the less fortunate was left in the hands of investors, what would our employment situation be right now?
The government feels justified in placing high tax rates on capital gains, money made on investments. It is probably because the investor didn’t really “work” to make money. High tax rates take money that would otherwise go back into the economy, as shown above. Instead it’s put into the highly inefficient government distribution system. After deducting funds to pay government employees to run the programs, the money may be given to a struggling single mom or to a scientist who is studying shrimp running on a treadmill.
The other effect of high capital gains taxes is if they are too high, people don’t invest. Why gamble (and investing is gambling) with your money if the government is going to take most of your gains. If investors don’t invest, there’s no money for entrepreneurs to start their businesses. There’s no money for existing businesses to expand resulting in no growth in the job market. Not investing doesn’t hurts the rich investor; it hurts everyone else.
So maybe the rich just being rich isn’t the crime it’s made out to be.