Higher eco­nomic free­dom lifts up the poor

The Star Early Edition - - INSIDE -

OX­FAM’S motto is “the power of peo­ple against poverty”.

You could be for­given for as­sum­ing Ox­fam pro­motes proven poli­cies that lift the poor out of poverty. In­stead, in its lat­est re­port, re­leased to co­in­cide with the an­nual gath­er­ing of the rich and pow­er­ful at the World Eco­nomic Fo­rum in Davos, Switzer­land, the group fo­cuses ex­clu­sively on the rich and calls for failed eco­nomic poli­cies that em­power gov­ern­ments and sti­fle growth.

Ox­fam’s dodgy cal­cu­la­tions demon­strate that the com­bined wealth of the world’s eight rich­est men is equal to the wealth of 50% of the world’s poor­est.

To ar­rive at its shock­ing statis­tic (no doubt for­mu­lated to shame in­di­vid­u­als in rich coun­tries into fork­ing over some of their cash to Ox­fam), it adds up as­sets and sub­tracts li­a­bil­i­ties to give a net worth fig­ure.

When your li­a­bil­i­ties ex­ceed your as­sets, you have a nega­tive net worth.

By this cal­cu­la­tion, 50% of Amer­i­can and Euro­pean youth who have just com­pleted their stud­ies at univer­sity and face a moun­tain of debt, fall into the bot­tom 50%.

The gap be­tween rich and poor is ir­rel­e­vant.

Com­pared to a bil­lion­aire, a mil­lion­aire is poor. As econ­o­mist Ju­lian Si­mon stated: “Data on the ab­so­lute gap be­tween yearly in­comes of the rich and poor coun­tries are be­side the point; widen­ing is in­evitable if all get rich at the same pro­por­tional rate, and the ab­so­lute gap can in­crease even if the poor im­prove their in­comes at a faster pro­por­tional rate than the rich.”

Ox­fam’s ob­ses­sion with re­dis­tribut­ing the wealth of the rich over­looks the tremen­dous strides that the world has made in re­cent decades to elim­i­nate poverty.

The World Bank clas­si­fies per­sons with in­comes of less than $1.90 (R25.78) per day as liv­ing in ex­treme poverty.

It demon­strates that ex­treme poverty in the de­vel­op­ing world has shrunk from 56.9% in 1980 to 34.5% in 2000 and 15.6% in 2014. For an or­gan­i­sa­tion that pur­ports to be fo­cused on elim­i­nat­ing poverty, Ox­fam strangely over­looks the fact that the world is on the cusp of a his­toric feat – the com­plete erad­i­ca­tion of ex­treme poverty.

This re­mark­able achieve­ment has been thanks to the wider adop­tion of more open trade and free mar­ket poli­cies that pro­mote in­di­vid­ual lib­er­ties.

Ac­cord­ing to the Fraser In­sti­tute: “The de­vel­op­ing coun­tries that moved most markedly to­ward eco­nomic free­dom achieved both strong eco­nomic growth and sub­stan­tial re­duc­tions in poverty.

“This in­di­cates that an in­sti­tu­tional and pol­icy en­vi­ron­ment con­sis­tent with eco­nomic free­dom is an im­por­tant in­gre­di­ent of progress against poverty”. In sim­ple terms, if you are poor, the best place to live is in eco­nom­i­cally free so­ci­eties where gov­ern­ment in­ter­ven­tion is kept to a min­i­mum.

That is why mil­lions of peo­ple try­ing to es­cape despotic na­tions con­trolled by over­bear­ing states seek refuge in the most eco­nom­i­cally free na­tions.

In ad­di­tion to its pro­pos­als on how wealth and in­come should be re­dis­tributed, Ox­fam calls for “in­creased co-op­er­a­tion be­tween gov­ern­ments to put a stop to tax dodg­ing and the race to the bot­tom on cor­po­rate taxes”.

But this in­tro­duced an ele­phant into the room. Com­pa­nies do not pay taxes. Peo­ple pay taxes.

Most large cor­po­ra­tions are owned by share­hold­ers (peo­ple) and groups of peo­ple such as gov­ern­ment em­ploy­ees through their pen­sion funds.

Since pen­sion and mu­tual funds are sim­ply col­lec­tions of the sav­ings of mil­lions of mid­dle and low-in­come in­di­vid­u­als, when Ox­fam calls for in­creased taxes or com­plains that com­pa­nies are not pay­ing their “fair share”, it is in ac­tual fact call­ing for re­duced dividends, pen­sion fund pay-outs and so on.

High cor­po­rate tax rates re­duce the returns on in­vest­ments and life sav­ings of in­di­vid­u­als.

If, as a share­holder, you do not like the idea of a com­pany try­ing to max­imise your returns, just sell your shares. No­body forces any­one to in­vest in any com­pany. What could be more demo­cratic?

In con­trast, try not to pay your taxes – you will al­most cer­tainly be hauled off to prison.

Most stud­ies show that a por­tion of cor­po­rate tax is passed on to work­ers in the form of lower wages and ben­e­fits.

Fu­ture wages are also ad­versely af­fected be­cause high cor­po­rate tax rates re­tard cap­i­tal for­ma­tion and re­duce over­all in­vest­ment. In­evitably, this has a nega­tive ef­fect on fu­ture pro­duc­tiv­ity and wages.

In South Africa, Ox­fam’s re­port raised the idea of a na­tional min­i­mum wage (NMW).

But an NMW does wide, un­told harm by pre­vent­ing un­skilled peo­ple with lit­tle or no work ex­pe­ri­ence from en­ter­ing the job mar­ket, thereby harm­ing the very peo­ple the pol­icy pre­tends to as­sist.

We can­not es­cape the eco­nomic truth that min­i­mum wages price some peo­ple out of jobs that they other­wise would have vol­un­tar­ily cho­sen to take.

The NMW will in­evitably ex­ac­er­bate poverty and in­equal­ity.

Scape­goat­ing the rich and fo­cus­ing on in­come in­equal­ity mis­di­ag­noses the prob­lem and shifts at­ten­tion from the real causes of poverty.

To per­ma­nently help the poor, his­tory has demon­strated that what is re­quired is greater lev­els of eco­nomic free­dom char­ac­terised by less gov­ern­ment in­ter­ven­tion.

This is the proven and surest path to in­creased eco­nomic pros­per­ity. Jas­son Ur­bach is di­rec­tor at the Free Mar­ket

Foun­da­tion

Scape­goat­ing the rich is wrong di­ag­no­sis of real causes of poverty

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