Poverty Is An Essential Market Signal

Story Stream
recent articles

It’s a fact-of-life that every viable presidential candidate must have a laundry list of solutions meant to stamp out poverty. John McCain says “Lower and middle income Americans need more help,” plus he opposed the 2003 Bush tax cuts given his belief that they favored the wealthy too much.

Barack Obama notes that there are 37 million Americans who are poor, and “We can’t allow this kind of suffering and hopelessness to exist in our country.” Both Obama and Hillary Clinton offer myriad anti-poverty programs on their campaign websites, and Clinton adds, “No one who takes the responsibility to work hard every day should have to raise their family in poverty.”

All three candidates seem legitimately concerned about the poor, but is eradicating poverty in what is for the most part an economically free country a truly compassionate idea? No doubt if they were campaigning in the slums of La Paz or Port-au-Prince, their words would have meaning. Where there’s little economic freedom, poverty is surely rampant due to the aforementioned lack of freedom.

But in the United States it would be hard to make the same argument. What we find here is that the poor and rich are very much a moving target. According to a November 2007 Treasury Department study, individual income mobility was considerable from 1996-2005, with “roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within 10 years.”

What the Treasury study shows is that misleading measures of average income statistics aside, individual Americans who are poor rarely remain that way. And if they do, their depleted existence is frequently a function of their own mistakes. So when we consider poverty in what is a very mobile country, we have to ask if there existed a magic program to erase it, would it be worth it? Likely not.

In what is an economically free country, stamping out poverty would be tantamount to voiding a highly compassionate market signal that tells us we’re doing something wrong. Simply put, without the reality that is poverty we’d have no way of knowing we were failing.

The poverty signal in the U.S. tells us to change geographical locales, to change our chosen line of work, and if we’re lazy, to work harder. Fear of poverty in a free country is what makes the prolific spender more parsimonious, the late sleeper an early riser, and the heavy drinker a teetotaler so as to show up to work clear-headed and energetic.

For the difficult-to-employ, the near-term poverty that often results from joblessness offers up lessons on what and what not to do once future employment is secured. As painful as job loss is, the fear of “what’s next” focuses us in such a way that we gradually cut down on the mistakes that put us out of work to begin with.

When we consider consumer products, from the Edsel to New Coke to the Newton, the market failure of all three was a strong signal from their customers that Ford, Coca-Cola and Apple Computer needed to make changes. For successful companies, the ability to fail is what fuels future success for the lessons learned. It is past business failures that provide today’s and tomorrow’s CEOs with a template showing what and what does not work.

It could also be said that fear of the joblessness that might result from bankruptcy or a takeover is what keeps executives and employees innovating, and working harder than they might. Failure, and the looming joblessness that it often foretells concentrates our actions very effectively.

Looking at the Internet implosion in 2000, awful as it was, it was useful in the sense that investors will forever have seared on their brains the need to diversify in terms of asset class, companies and level of risk. Investors will surely make mistakes in the future, but the fact that they were allowed to fail means that they’ll navigate the next bull market far more wisely.

All of which brings us to the present difficulties in the real estate market. In this case the federal government is seeking to cushion failure, to try and soften the sometimes sharp edges of capitalism to save homeowners and mortgage investors alike. What a shame. Just as government handouts to the poor often delay the process whereby they fix what they’re doing wrong, if the housing and mortgage markets are saved on the backs of taxpayers, no lessons will be learned. That politicians are presently trying to blunt the truth offered by market signals makes it a near certainty that more investment mistakes will be made in the housing sector down the line.

It’s paradoxical, but the happy truth is that poverty and all forms of economic failure are every bit as much a fact-of-life in the United States as wealth is. Indeed, it is because we can fail so spectacularly here that we’re also able to achieve so much.

Ultimately, wealth and poverty are two sides of the same coin; both essential market indicators in the way that consumer prices are. And if the federal government tries to protect us from the downside of free markets, it will surely rob us of the economic signals that tell us how to become rich.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

Show commentsHide Comments

Related Articles