Borrowing from Peter to pay Peter
Published: July 22, 2011
Time posted: 7:03 am
Dear Mr. Berko: About five years ago, you guest-lectured to an economic class in Columbus with a fascinating explanation of why the rich must become richer to guarantee economic activity.
I lost my notes, and now I’m hoping against hope that you may be able to reproduce those comments.
I need them for a presentation I will be giving in September. Please help. –GH in Akron, Ohio
Dear GH: Yep, I can help.
The following derives from a monthly discussion group of which I used to be a member years ago before they began to drink too much at the meetings.
The comments may sound elitist but: “Business activity cannot sustain itself unless the rich become richer.” And if Karl Marx were alive today and reading this comment, he’d turn over in his grave — twice. So to help the rich get richer, our government must become a 21st century Robin Hood.
Our government borrows money from the rich to be given to the poor so the poor can continue giving it back to the rich. And this is why there will always be a budget deficit plus a growing national debt. The following elementary illustration should put it in focus for you.
Assume there are two classes of Americans: the rich and the poor.
Rich folks are those with above-median incomes, and the poor folks are everyone below. And the principal reason the rich must get richer is they must make an after-tax profit if they wish to continue employing the poor to produce goods and services. Profit may be the second most powerful incentive in our galaxy.
The rich cannot profit from traditional trading between themselves. For example, if there are 10 rich folks in a closed room and collectively they have a total of $10 million in cash, they can connive and deal amongst themselves and enjoy a jolly good time.
But when the cows come home at the end of the day or the year, there’s still $10 million in the room. The value of their stocks, real estate or paintings won’t increase unless another group loses money to them, perhaps a designated patsy.
Capitalism is a game of seven-card stud with random wild cards. Strong players crush the weak, or the rich crush the poor. However, the poor only have a finite amount of money to lose. So after a few losing hands (often with a marked deck), this poker game must end unless a designated patsy with more money can be found. And that designated patsy is our U.S. government via the Fed and the Treasury.
Far-fetched? Well, follow the bouncing ball.
Economists who follow money transfers noted that in 2007 the poor paid approximately $1.2 trillion more to the rich for rent, food, cars, health care, tools, etc. than they earned for labors at fast-food restaurants, hotels, big-box stores, lawn care, etc.
So in order to keep the poor from going completely broke, the government, through taxes, took $520 million from the rich and gave it back to the poor via Social Security programs, welfare and myriad other subsidies.
Then, to return the additional ($1.2 trillion less $520 billion) $700 billion to the poor so their purchasing power would remain intact, the government borrowed $700 billion from the rich by issuing new Treasury bonds. Basically, the government borrows from Peter to pay Peter.
So after taxes and transfer payments were complete in 2007, the rich made $700 billion, the government lost $700 billion, which was the deficit, and the poor broke even.
In effect, the budget deficit equals what the rich keep after taxes. If the budget is balanced, the rich won’t make money. And if the rich can’t make more money, their incentive to produce will collapse.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at firstname.lastname@example.org