The Rich get Richer and the Poor get Poorer…and Why!

The following lecture was given at Chicago Area Mensa’s Regional Gathering, October 28th, 2000.

It’s a real pleasure for me to be invited to speak at this Regional Gathering, and make my way for the first time to this great city of Chicago, in the United States, the richest country of the world.

I don’t know whether you realize just how rich the United States is in comparison to the rest of the world. If we shrank the population of the world down to just one hundred people, then fifty per cent of the world’s wealth would be in the hands of only six of those people. All of them would be citizens of the United States.

Two thirds of the world’s population has an income of two dollars a day or less, and many have to work very hard for it. Yet any one of us North Americans with twenty thousand dollars of net worth can, by investing that, get an income of that size without doing a hand’s turn of work, simply by holding the investment. Let alone the capital gains that can come if we know how to profit from the stock or the commodities market.

That being the case, some other statistics about this, the richest country of the world, should cause us concern. There are 200 billionaires, and eight million millionaires in the United States, a number that has increased fourfold in the past ten years. Yet look at some other statistics:

  • Thirty million people in the U.S., about one tenth of total population, suffer from food deprivation.
  • 3 million are homeless, a 100% increase in the past ten years.
  • One child in five in the U.S. lives in poverty, defined as having less than one half of the median income of the total population.
  • Over fifteen years, the family incomes of the lowest 20% of the U.S. population have shrunk by more than a fifth. The incomes of the highest 20% have risen by thirty per cent.
  • The poorest fifth of the U.S. population have less than one twenty-fifth of the country’s total income: the highest fifth have approximately half.

But this is not just to blame the United States. Alberta, Canada, where I come from, prides itself on being the most prosperous province in all Canada. Yet Edmonton, its capital, has equally high rates of child poverty, concentrated particularly among aboriginals and single parent families. The food bank, set up as a temporary measure after an economic downturn hit the city in 1982, now serves twice as many, about 3% of our population, some on welfare, but nearly one third are members and families of the ‘working poor’.

Ten years ago, our Parliament decided to fight a war on child poverty, yet the situation is worse now than then. The top 20% of our population are actually noticeably better off than they were twenty years ago. The next 20% are about the same. Below that, the poorer you are, the worse your situation has become. Particularly, young males in the 18-24 year old group have worse average wages and worse employment prospects than ever before.

For young males, this makes earning a living in the free enterprise drug culture an attractive way of life. For girls, there’s the possibility of prostitution. Both of these alternatives generate immense social problems. There’s a real connection between unemployment and crime levels. So while the poorest of the nation fill the jails—one quarter of all persons in prison in the world are in the United States—the richest ones are also forced to live behind walls and bars in their own ‘gated communities’ out of fear of crime.

There are also international ramifications to all of this. Fidel Castro, that Cuban president the U.S. loves to hate, recently addressed a meeting of 100 leaders from the world’s poorest nations. Comparing spaceship earth to a ship, he points out that “trifling minorities are travelling in luxurious cabins … 85% of the passengers on this ship are crowded together in its dirty hold suffering hunger, diseases and helplessness.” So he proposes destruction of the International Monetary Fund, cancellation of all Third World debt, a war crimes trial for those responsible for the new global economic order, and a tax on speculative financial transactions to protect vulnerable economies, and raise a trillion dollars for Third World development.

The massive protests around the meetings of G7 leaders in Seattle and elsewhere, the complaints about third world debt coming from the Pope and many churches, perhaps indicate that there is a groundswell of dissent beginning to build; all is recognized not to be well in our self-satisfied economic world. Communism may not be an answer, but the ‘competitive free enterprise system’ obviously is also not delivering the goods to everyone’s satisfaction.

The strange thing is, that only ten days ago I was listening to a presentation to the Economics Society of Northern Alberta, giving a highly upbeat and positive answer to the question asked in the title of its message: “Can the Good Times Last?” It is as if different elements of society are living in completely different worlds—or perhaps, as one doctor described his work—“The operation was a success, but the patient died.”

What seems to be missing, though, is an understanding of what lies behind the tendencies of our times, and without this, many efforts to put things right are doomed to founder. Raise the minimum wage? Then young people will find it even harder to get a job. Run a food bank? Then the forces of competition will allow poor people to accept lower wages or pay higher rents, all at the expense of the charitable donors. Government make work projects? They encourage political boondoggles, and statistics show they can actually deter initiative and cause unfair competition with established enterprises. Forgive Third World debt? Then banks would no longer be able to balance their books, and we would all be faced with economic collapse.

So what I would like to do is to take a sober look at the monetary factors behind this growth both of extreme riches and extreme poverty. Unless we diagnose the problem, the remedies we propose are not going to make things better, and may well make them worse.

In the spirit of our tour of your Forensic Laboratory yesterday, I suggest that we need to look at clues, and that the first clue to what is going wrong around us lies in looking at the actual budgets of the rich and poor.

Whoever we are, we need to buy in order to live. Whatever we buy has a cost. The cost is broken down into a number of factors.

  • One is the Wages of Labour
  • Second is the Overhead of Capital used in production
  • Third is the Rent of Resources
  • Fourth is Taxes paid for Government Services
  • Fifth is the Interest Cost of Financing the business enterprise.

Each of these costs involves payments that give a stream of income. Incomes do not only come from wages. They come from interest or dividends on investment. They come from rents and royalties on resources. They come from wages in government employment, and pensions and other government assistance programs. An income of wealth also comes from ownership of property: what we own, we do not have to rent from someone else, so our standard of living can be just as high even when our income of money is smaller.

Look now at the budget of the typical family in poverty. Rent is an enormous part of it, unless the homeless sleep in cars, with friends, in shelters, or on the street. Interest is another—the cost of buying ‘on time’ rather than outright, reflected in the additional cost of finance charges. Taxes are likely less of a burden, although even the poorest contribute to the cost of government in sales taxes which put up the price of what they buy. Wages and Business Overhead go into the prices of all the products they buy. To balance all these costs, the poor have only one major stream of income, their wages, possibly helped in cases of real destitution by some sort of welfare payment from Government.

Contrast that with those in the upper brackets. The rich own their homes: no rent to pay. Indeed, they may well have invested in real estate or natural resource development, and so receive rents from others. The rich do not borrow to survive. Rather they have ‘money in the bank’ and investments, and can live on ‘unearned income’ whether or not they have a job as well. The rich do indeed pay taxes, and perhaps receive less in value from government than they pay (though they are likely to receive substantial government help in the cost of their children’s higher education): current trends in politics, however, (which are very much influenced by ‘big money’) are to reduce this contribution by the wealthiest, and push it further down the income scale.

To sum up. The poor have one and one half streams of income—wages and government help—and five streams of outflow: rent, interest, and taxes, as well as the wage and overhead costs in the products they buy.

The rich have four streams of income—wages, rents, business profits and interest—and three streams of outflow: wages, overhead and taxes. Further, their budgets do not include the elements of rent and debt payments that consume so much of the budgets of the poor. The real difference lies in the areas of unearned income—rents and royalties (from ownership of resources), capital (from ownership of productive assets through investment), and interest on the money they have in the bank.

What is alarming is that this situation is so rapidly worsening. It is harder and harder to get a job without a high level of education (itself a form of investment), and the jobs of those who do not complete high school are unstable and poorly paid. But when the world’s chess champion can be defeated by a computer program, even Mensans should tremble at the challenge that the computer makes to their skills and hardly acquired knowledge. Even Mensans tire of solving complex problems twenty four hours a day. The computer never wearies!

Moreover, employment itself is changing. We do not nowadays have armies of farm workers in the fields, or women stitching shirts or rolling cigarettes. Today’s appliances and automobiles are ever more complex, and are assembled more and more on robotic production lines. Mass employment today no longer comes from making products. It comes from making the tools that make the products, after which the labour force is largely unneeded.

If we build a power station to generate electricity, for instance, thousands of workers will be employed at the time of building, to put it together before any electricity is generated. I have calculated that one of our local power stations, designed to last for thirty years of life, spent 56% of its total cost for that 30 year period, before a single unit of electricity was generated. Thousands of people were needed to build it—just a dozen at a time are needed to run it.

Once in production, a dozen people can run it: the thousands are laid off so have no incomes to purchase the electricity, unless they can find another project to work on. Other areas have a similar economic situation. If we want to raise pigs, the only way we can meet the market in price is by starting an operation with a minimum of 5,000 animals, and an investment of $2.5 million in an automated plant to do it. The number of old fashioned ‘family farms’ is declining swiftly, and many are in a perilous financial position. So are the rural communities to which they belong.

What we have is an economy where the only way many people can earn money today, is by investing more and more in projects that promise us wealth tomorrow. If we don’t, the whole spiral collapses into an economic depression. Yet the resources of the world are finite. Some time in the future, a crunch point is going to come.

The problem of the poor centers around the fact that they don’t have ownership of much in the way of resources. And that brings me to the key to the problem—the ‘unearned income’ and the cost of interest and rent, that have made the difference between being rich and poor in the modern world.

Firstly, that question of rent. Primitive societies share the land. It is provided by nature, and it is owned by the community at large. Over time, though, people improve it with houses, roads and farms. They ‘enclose’ common lands, or take them for homesteads. Land becomes private property and is bought and sold. Those who used to have common rights—whether they are the aboriginals of this continent, or the displaced, “sturdy beggars” of the sixteenth century, Scottish crofters, or the Irish who crossed the Atlantic in potato famine days—all have been squeezed out by those who have taken their common land from them.

If we live on land we do not own, we have to pay rent. If we buy it, we will likely finance it with a mortgage. In either case, what we are prepared to pay per month will be the difference between what it costs us in time and expense in travelling to ‘marginal land’ which costs less, but uses more of our resources to get to work. So young couples have the choice—live downtown close to work, and pay a high rent or buy at a high price, or move out to the suburbs and spend a great deal of time, trouble and money in a daily commute. Either way, it’s a bite out of our standard of living.

I’m sure all of you have at some time played the game of “Monopoly”—the game where properties are bought and sold, and rents charged, until in the end one player owns the whole world and the rest are bankrupt. The idea of Monopoly was derived from an earlier game, “The Landlord Game”, devised as a teaching tool to popularize the ideas of the American economist, Henry George. I guess much of my own interest in economics started with the furious games I used to play at school before I reached my teens. Yet I wonder how many of us have enjoyed the fierce cut-throat competition of this game: buying properties, building houses and hotels, charging rents, squeezing the other players to the wall, without realizing that this is a picture of the world we actually live in. The vast majority of players in our economy are heading towards bankruptcy. Just one player (Bill Gates, perhaps) in the end will be the owner of the world. None of us here is likely to be the lucky winner!

George’s remedy for this situation was to impose a tax on ‘site values’, for the benefit of the community at large. Privately owned sites receive their value from the presence of the community: the community should therefore be the one to profit from their private exploitation. In several towns and cities, George’s ideas have been used as the basis of a tax system which imposes the heaviest property tax on the site, not the improvements of buildings and so on. Cities like these don’t have vast areas of their downtown in empty parking lots, where buildings have been torn down to avoid owners having to pay taxes on improvements. This type of taxation gives an economic incentive to use every square foot of property to maximum advantage. Equally the same system can be used to obtain royalties on the exploitation of natural resources. In Alberta, we don’t have too many oil millionaires, but the Province itself has been rescued from bankruptcy and set on the path of prosperity and low taxation by royalty revenues being paid to the Provincial government. This Alberta idea has been carried even further in Alaska, where oil revenues have been channelled into a fund that pays a regular dividend to every Alaska citizen.

Monopoly, though, is played with a very naive sort of banker. Have you ever tried playing the game with a bank run the way commercial banks are run today? I have played the game that way only once. It was one of the most depressing evenings of my life. A bank is an institution that accepts deposits of legal tender money—gold, silver, notes of the state or central bank—and gives out its own promises to pay in exchange. As long as you don’t ask for the actual legal tender money back, banks can create and issue their ‘promises to pay’ (their deposits) almost without limit. So the bank can make loans that enable particular players to buy property (subject to their mortgage, of course), favouring some and rejecting others, in the same way as most house purchase are financed today.

The bank makes profit by charging interest and making charges, but my experience was that the Bank’s real profit and power came from expanding the money supply, creating a boom with rising prices and property values, and then bringing prices crashing down with a credit squeeze. By creating such a cycle of boom and depression, all property starts to be owned by the bank, buying low and selling high. In the end, property is sold for far less than its nominal cost, everyone is in debt, and the game grinds to an unpleasant halt with only the Banker in charge.

The essence of banking is that the bank can create credit—it does so every time you use your credit card, and your signature on the sales slip is exchanged for a credit to the supplier on the books of the bank. However, to balance the bank’s books, every credit must be matched by a debt, what you owe on your charge statement, for instance, so that if depositors cause a ‘run on the bank’ by wanting ready cash, those debts can be called in. The biggest borrower in real life is usually the Government, often having borrowed for purposes of war, or social relief programs in times of depression. As a consequence, an enormous part of government taxation goes to pay interest on that debt. The Welfare State is designed to take from the rich to give to the poor—but the catch is, that the interest on the debts it causes generally come from the poor and middle classes, to give wealth to the rich.

Nervous politicians protest that we have to repay the National Debt. If they do, one of two things will happen. One possibility is that the economy will come to a standstill, as money loaned to the government is taxed from the people, paid back to the banks, and so cancelled. The second is that the people themselves will balance the repayment with much higher personal debts of their own. Some of this will be home mortgages, some of it financing purchases of cars and major appliances on time, some just charge card credit, not balanced by any tangible assets, and some will finance leveraged speculation in commodities or on the stock market.

Personal debt on inferior quality of credit is rising rapidly in the United States and Canada at the present time. In the U.S., the National Debt is far, far above the trillion dollars that was a worry in Ronald Regan’s time, and there is a major increase in the overseas trade deficit, all of which contributes to the high exchange rate of the U.S. dollar, and the rush of imports from low wage countries. It seems certain that at some time soon, the whole inflated balloon of bank credit, which has to be puffed up more and more year by year, is going to explode, when the poor of this world, at home and in impoverished Third World countries, can no longer pay their debts and their taxes, and the whole system dissolves in bankruptcy.

Another economist, Irving Fisher, from this city of Chicago, wrote a book in the thirties called 100% Money, in which he explained how unnecessary this debt system was. His proposal was that all money be issued by a government authority, so that the profit from money creation would flow to the community which gives money its value, not to the banking interests, who simply create the money tokens. The wonderful result would be that, instead of the Government regularly going to financiers to find out how much it has to pay month by month and year by year in interest on the National Debt, the Bankers would regularly come to the government, to find out what interest rate they would have to pay for the privilege of creating money. Just think what that could do for your tax rates. They could be cut by at least a third—and why not?

Such a system was used by the Bank of Venice in the Middle Ages, an institution that lasted for six hundred years and financed the richest and most successful trading city of its time. It was used in the American Colonies before the War of Independence, by Abraham Lincoln with the ‘Greenbacks’ he introduced at the time of the Civil War, in Alberta’s Treasury Branch system, in the Treasury Notes of Great Britain when its banks ran out of gold at the start of World War I, by the island of Guernsey; all these are successful examples of this approach. There’s no reason why improvements to municipal infrastructure, roads, bridges and so on, could not be financed this same way. That is the essence of the ‘Sovereignty’ campaign, both here and in other countries, aiming to give help to municipalities facing financial problems. But the rich have a great deal of influence in politics, and the suggestion has so far fallen on deaf ears.

So there we are. The community gives value to land, resources and dollars, but we have developed a system where these values are monopolized to an ever increasing degree by those in a position to exploit them. The rich get richer, the poor get poorer, the environment gets placed under ever increasing pressure, debt piles up, famine faces the poor here and in the poorer countries of the world, and most of us live so much with the daily challenge of paying our mortgage or our rent, and keeping up with our bills, that we have no time to think of how to do things differently.

There are better ways to go. Mensans are supposed to be the ones who have enough brains to find them. Will we do so?

– Text of a lecture delivered in October 2000