Poverty and Inequality: The Business Cure

imagesPoverty has long been a cause celebre; inequality seems the cause du jour. The oceans of ink spilled on these topics are mostly finger-pointing, short on solutions, and the solutions are too often worse than useless. But three pieces in a recent issue of The Economist stood apart.

The “Schumpeter” business column, headed Not open for business, concerns why U.S. employment lags despite massive government stimulus. What government gives with one hand it smothers with the other. Start-up companies account for all of America’s net job creation,* and government is stifling them.

First, they’re starved for human capital. Our native students don’t acquire enough of the right skills; and when foreigners do, “the authorities do their best to drive them out of the country once they have been educated or to break their spirits on the visa treadmill.” Legions of foreigners who want to work here or start businesses wind up going elsewhere due to our suicidally restrictive immigration policy.

UnknownSecondly, there’s over-regulation. In 2009-11, Schumpeter relates, 106 new regulations were issued with projected annual economic impacts exceeding $100 million each. I’ve written about how legislation like Sarbanes-Oxley and Dodd-Frank imposes vast new bureaucratic requirements. Giant established companies, with armies of lawyers, can cope, but not small and starting firms. The dramatic decline since 2001 in new companies going public is no coincidence.

This is part of government’s war on business. You’d think, given the parlous state of U.S. employment, there’d be a cease-fire. And (notwithstanding all the anti-business rhetoric of “progressives”) neither the public nor the government actually wants this war. images-2Yet it goes on, because too few seem to grasp that for good jobs paying good wages you need good businesses earning good profits. Here in New York politicians like Gov. Cuomo talking “economic development” seem oblivious to the war. Recently the state sued a host of smaller firms because a workers compensation trust into which they’d long faithfully paid can no longer meet employee claims; many face being driven out of business.

If you want to redistribute wealth, first you’ve got to create wealth to redistribute.

Next there’s a book review – The Great Escape: Health, Wealth, and the Origins of Inequality by Angus Deaton. In a nutshell, much of the hand-wringing over supposed rising inequality overlooks non-money factors, most notably health and longevity, where the gap between rich and poor has been narrowing significantly. Deaton does recognize the billion or so in poor countries still excluded from this trend. Should we give money to help them? His answer is basically no; while some targeted health programs are effective, most foreign aid does more harm than good because the key problem is not lack of resources but bad governance. And aid tends to keep bad governments bad.

Unknown-1Which brings us to another book review: of Paul Polak’s and Mal Warwick’s The Business Solution to Poverty. You read that right: capitalism, which so many (so wrongly) blame for poverty is really the solution. Rather than seeing the poor as victims needing handouts, the authors see them as potential workers and customers.

They write mainly about the latter role, and how products and services can be targeted to the needs of poor people, which if done right not only generates profits but also improves life for the purchasers. We see, yet again, the error of viewing business as merely exploitive. What business is instead really all about is profiting by satisfying others’ needs and wants.

Unknown-2And, more broadly, again it is capitalism, business, industry, commerce, enterprise, that is the answer to poverty: not people given money but earning it. Rich countries, and rich people, in the main, are rich because they produce things that better the lives of others. That’s how the whole world gets richer.

* I.e., among other employers, job gains and losses cancel out.

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6 Responses to “Poverty and Inequality: The Business Cure”

  1. Gregg Millett Says:

    I love creativity and enterprise — not necessarily connected with profit. I love simplicity — don’t feel comfortable with million dollar cars, homes and yachts. I think the labor unions built our middle class and were most responsible for making our country what it is. Workers of the world, UNITE!

  2. Jim Bulmer Says:

    Our culture is changing. It’s the natural way of things, and we have no idea what shape it will take next, how are we going to handle it? We had a socio-religious economy ( all for the state and religion), now we are a capitalist, not-so-socio culture and now something else is coming and how are we going to handle it?

  3. Don Odell Says:

    The one area in which we may be in agreement is the plight of small businesses. There is more free enterprise at that level. When one considers big business and big government, I think they work well, too well, together. And, as I understand it, much of the job creation is at the small and start up operations. I don’t see big business being any friend of these operations any more than I see big government being such.

  4. Karl Miller Says:

    I keep forgetting that the 2008 crash was caused by the 2010 health care law and 2011 debt ceiling fight. That’s just thinking right there.

    “… too few seem to grasp that for good jobs paying good wages you need good businesses earning good profits.”

    Good businesses are earning good profits already. Better profits than ever, actually. Business has recovered from the crash quite swiftly and thoroughly.

    “If you want to redistribute wealth, first you’ve got to create wealth to redistribute.”

    Indeed. And if you stare in the mirror and repeat “A=A” a hundred times, you won’t age a single second, I promise.

    Again: $2 Trillion sits dormant in the financial services sector right now and that figure is growing exponentially unto itself because the investor class is recycling it at an altitude where there is little risk and even less contact with on-the-ground business. They don’t invest in new on-the-ground businesses because a) for 30-odd years our tax code has prized investment over production and b) there is too little existing *demand* for the risk. Much as many on the right want to re-live the 1980s, ours is not a supply-side crisis. The supply side is doing better and better this time ‘round.

    There is too little *demand* because productivity (supply) growth has, until very recently, gone to pay for 1) health care inflation and 2) dividends for the investors instead of 3) wages for the workers who actually made the productivity gains possible in the first place. Mercifully, that’s starting to change now that the ACA finally makes health care costs transparent. But judging in terms of productivity gains, every worker in America deserves a huge overdue raise. And if corporations and investors will not provide it – or have no incentive to provide it – then our representative-democracy will continue to take up the slack by paying for health care, unemployment benefits, a minimum wage, and targeted loans and investments of its own.

    As for those pesky regulations: $10.6 billion/year out of a $17 trillion economy strikes me as a fantastic bargain if it prevents another 2008 crash. Not sure what the gripe is there. But then, there are no specifics cited in the article, so … “war on business”! Yeah!

    Income inequality is not the problem so much as it is a huge symptom of a bigger problem: the lack of class mobility. The wealthy are not permitted any consequence for their fuck-ups and the poor and middle-class are not rewarded for their efforts and productivity gains. Meantime, wealth cannot literally “trickle down” when it floats free of gravity in a separate investment economy. Until the tax code aligns with actual class boundaries, class mobility will continue to stagnate, the middle will continue shrink, a handful will continue to do better and better, and the government will be used to pay for more and more.

  5. Jeff Cook Says:

    Business is the answer to poverty, whether a sole proprietorship or mega corporation is not important. Business provides jobs that create tangible wealth and things of value that results in salaries that allow people to buy goods and services that feed a healthy economy. We need people working, not on public assistance. Things aren’t working very well now. The cause is the relationship between and restrictions posed by crony capitalism at every level of business and government. Business and people both affect government policies, and in the act of catering to both government policies create a very complex environment. For example, greedy businessmen did not send American jobs “overseas”. The government did. At all levels of society government, taxes, fees, favoritism, laws, rules and regulations, now numbering in the millions of pages make doing business for private manufacturers and making enough profit to remain here and survive impossible. With the cost of compliance with “government” so high, they are not competitive in world markets and their only option to survive is to move to a more business friendly environment. An overburdening government caused many “jobs” to move “overseas”. Many of the same government influences affect smaller business’ and start ups, too. What becomes more important at State and local levels are government protections of existing business’ through licensing and regulating them. That activity protects existing business and discourages new ones. Licensing for everything from doctors and engineers to people that braid hair often serve more to protect existing business than to protect consumers. Limiting the number of liquor stores doesn’t protect the public, it protects existing liquor stores. Rather than government, a more natural force called competition should decide the winners and losers. This relationship between government and private business has an adverse impact on creativity, innovation, business start-ups, and free markets that lead to a free economy that can develop and grow naturally. While business development copes with those restrictions, government monetary policy, favoritism, handouts, and meddling in markets adds to our troubles. When this great democratic experiment began and we shrugged off a king and his minions we had citizen legislators that represented the people and the individual states. Today we have a king and his host of barons, dukes, and earls. They have merely changed titles and clothes and today they are our executive branch, government employees, and legislators. We started with a central government with very limited powers. Now we have a central government that has a law, rule, regulation, or policy for everything you eat, buy, sell, trade, use, and do. I can’t think of anything the government doesn’t somehow control except possibly when nature decides an individual woman should menstruate. Over the years, bit by bit, law by law, rule by rule, and regulation by regulation everything is controlled. We have come full circle from the start. What we have now are no longer public servants and representatives of the People; through excessive laws, rules, regulations, and policies they have become our rulers and masters

  6. Herb Van Fleet Says:

    Fist, I agree with you that our education system is deserving of an F minus, at least in the K-12 grades. This leaves them ill prepared to move on to higher education, even at the community college level, and then into good paying jobs.

    In contrast, students from almost all other developed countries have excellent K-12 schools and there are well prepared to take advantage of our colleges, then bringing that expertise back home. I seriously doubt whether, “the authorities do their best to drive them out of the country once they have been educated or to break their spirits on the visa treadmill.” Seems a bit overstated.

    That said, many solutions to our education problems have been offered, of course, but are low priorities at moment. Besides, any fixes are way too expensive for bankrupt governments to address.

    As to the over-regulating issue, my guess is that we have too many regulations addressing the wrong things, like OSHA, and not enough where they are needed most, like the financial industry. Making things worse, enforcement of these rules is lacking. This is due partly to the lack of staffing (which creates new jobs!) resulting from the lack of funding. We also have people with the wrong skills doing the enforcement. The SEC, for instance, is filled with too many lawyers and not enough forensic accountants. As a result you have Enron, Madoff, and numerous villains from the housing bubble; many of which are too big to fail (which means too powerful to attack.)

    In any case, the “trust me” approach just doesn’t get it. Madison said if men were angles, we wouldn’t need governments. I say if businessmen were angles, we wouldn’t need regulations.

    Capitalism is great if you have the right kind. We don’t. In fact, I challenge your ending declaration that, “. . . it is capitalism, business, industry, commerce, enterprise, that is the answer to poverty: not people given money but earning it. Rich countries, and rich people, in the main, are rich because they produce things that better the lives of others. That’s how the whole world gets richer.” You apparently see our economy as a meritocracy. It is not.

    In that regard, here are a couple of good articles that explain better than I can why capitalism, the kind that operates in this country, only increases poverty and widens income inequality:

    http://www.nytimes.com/2013/01/13/sunday-review/americas-productivity-climbs-but-wages-stagnate.html

    and

    http://www.nytimes.com/2013/03/04/business/economy/corporate-profits-soar-as-worker-income-limps.html?pagewanted=all

    As to small businesses being job creators, they definitely are. In recognition of this, the budget for the Small Business Administration has gone from $528 million in 2008 to $949 million in 2013. And the budget for 2014 is $1.13 billion. Hard to see how government, both the White House and the Congress, are not helping small business.

    In short, your post reads like it was taken directly from the Tea Party Gazette — perpetuating the myths of trickle down economics and how the rich create jobs.

    Reminds me of H. L. Mencken: “There is always a well-known solution to every human problem–neat, plausible, and wrong.”

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