How Capitalism Will Save Us (24 page)

Free-market opponents—including many who are rich themselves—say
the growing number of rich proves that our economy is divided into “two Americas.” One is made up of the wealthy, who keep moving ahead at the expense of everybody else. Barbara Ehrenreich, a vociferous critic of capitalism, summed up this view in the
Nation
magazine. She called the rich “a bloated overclass” who in certain ways “drag down a society as surely as a swelling underclass….”

She writes scornfully, “A lot of today’s wealth is being made in the financial industry, by means that are occult to the average citizen and do not seem to involve much labor of any kind, we all pay a price, somewhere down the line.”

Those who do not share Ehrenreich’s anger nonetheless have plenty of complaints. Among them: the rich make life miserable for others by driving up the price of everything. A few years ago,
New York
magazine ran a cover story, “Don’t Hate Them Because They’re Rich.”
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According to the article, Manhattan was a place where, if you weren’t spectacularly wealthy, you were jealous of someone who was: “The more rich people there are, the tougher it is for everyone else to get by, to afford apartments and live the New York life they dreamed of. How wonderful is Central Park if you live an hour away by train?”
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The article observed, “It’s almost as if the superrich have cordoned off much of Manhattan for their own personal use, distancing themselves from the workaday rich and building a social class all their own.”

The financial collapse of 2008 deepened this resentment still further, with many blaming “hedge-fund billionaires” and greedy Wall Street for the nation’s economic woes. The downturn seemed to provide the most powerful proof yet that America is a land where the poor and middle class keep falling further and further behind and are victimized by the selfish rich. Barack Obama seemed to suggest this when he insisted that the 2008 financial crisis was the result of “a philosophy we’ve had for the last eight years—one that says we should give more and
more to those with the most and hope that prosperity trickles down to everyone else.”

Columnist Daniel Henninger has noted that the president’s tax and spending policies have been shaped by this view of the rich and “everyone else” as being two distinct groups on opposite sides of some imaginary divide, with rigidly disparate economic interests. He cites commentary included in the administration’s budget document that asserted, “There’s nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few…It’s a legacy of irresponsibility, and it is our duty to change it.” An appalled Henninger writes,

Bashing “rich people” may be good for getting votes during political campaigns. But in the Real World, the rich do not get rich at the expense of the poor. The opposite is true: they make their fortunes by meeting the needs and wants of other people—by building or providing capital for innovative, job-creating businesses whose goods and services make life better.

There’s no question that those who contribute innovations in our entrepreneurial economy can reap immense rewards. Bill Gates had virtually no wealth at all when he set up Microsoft in 1976. By the turn of the twenty-first century, he was worth over $60 billion. The boom in high technology, finance, and other sectors over the past thirty years has created numerous newly rich individuals. But this wealth was not made at the expense of the poor. Entrepreneurship and capital investment by rich people are responsible for businesses that created 1.4 million jobs annually over the last decade. Americans couldn’t live without cell phones, laptops, BlackBerrys, high-definition TVs, and new medical procedures—innovations produced from the investments of wealthy individuals that have helped people throughout society get richer.

Take the favorite target of Ehrenreich and other capitalism bashers—Wal-Mart.
A drag on the economy? The company employs some 1.4 million people, 1 percent of the U.S. workforce, and two million worldwide. It has generated billions for countless vendors and suppliers, not to mention thousands of stockholders, helping to finance the retirement and college savings of countless families through 401(k)s and college funds. By selling its products—including food, and recently, medicines—at 15 percent to 25 percent less than the average prices, Wal-Mart also helps its customers live better by getting more for their money. Even the most fervent adversaries of the retail giant acknowledge these benefits. In the 2008 recession, customers flocked as never before to Wal-Mart precisely because of its low prices. In that sense, Wal-Mart does more for strained household budgets than any government program.

Wal-Mart is just one of the wealth-creating contributions to our economy from members of the
Forbes
400 in 2008. There’s also Facebook, launched by Mark Zuckerberg, the
Forbes
400’s youngest member at age twenty-four (net worth $1.5 billion), the Home Depot, cofounded by Arthur Blank, sixty-five (worth, $1.3 billion), and Fidelity Investments (Edward and daughter Abigail Johnson, worth $11 billion and $15 billion, respectively). And that’s to name a very few.

History books portray the rich of the nineteenth century as rapacious oligarchs—“robber barons”—who amassed their immense wealth through their ruthless treatment of workers and nearly everyone else. The reality was more complex. Most of the robber barons made their fortunes building railroads or opening mines, oil fields, or retail chains. What is underemphasized, or just plain ignored, is the degree to which these innovations dramatically raised the living standard of what was then a hardscrabble, rural society where backbreaking labor was the rule and the average American faced a level of hardship unknown today. It was this new affluence, some observers believe, that helped to stoke subsequent labor movements by encouraging
rising expectations
, impatience with the pace of change.

Tom Sowell rightly observes that people who start businesses are actually the
last
to benefit from the wealth they create. They reap their profits after paying off their workers, creditors, and investors—and that’s when things are going well. If business isn’t thriving, they may never see a dime.

You don’t get rich off the sweat of others in a free-market economy—unless you’re former college football player Kevin Plank, who founded Under Armour, the perspiration-absorbing athletic-apparel maker that went on to make him a fortune in little more than a decade.

Contrary to the claims of populists, high earners pay the largest share of taxes. According to the Tax Foundation, the top 10 percent of households—with incomes roughly $100,000 or greater—pay roughly 70 percent of all federal income taxes. That share is up from just below 50 percent in 1980.

Critics of capitalism like to give the impression that “rich people” are a fixed aristocracy. Yet only 19 percent of families on today’s
Forbes
400 list have inherited their wealth. When the rich list appeared in 1982, it was populated by Rockefellers and du Ponts. Today there is only one Rockefeller—ninety-four-year-old David. As rich families proliferate, wealth is divided and often depleted. It’s hard for families to stay rich for more than a generation or two.

Fail to invest successfully or work productively and your net worth will quickly decline. People hold up free-spending Paris Hilton as an example of the selfishness and self-indulgence of wealth. What they don’t understand is that, unless she buckles down and actively builds up what she inherited she will become an example of downward mobility. One especially sad example is the once-mighty Astor fortune. At its height, the family wealth exceeded, relatively, that of Gates and Buffett put together. The Astors owned a big chunk of Manhattan. But as the family multiplied, their business acumen declined. The late Brooke Astor in fact took pride in giving away most of what remained of the fortune to a variety of charities, such as the New York Public Library. Since then, the family’s sad, scandalous story has become tabloid fodder: her son, eager for the remnants of this once-colossal fortune, was accused of abusing his aging and ailing mother, providing her with inadequate care, and forging changes to her will.

The moral? Even the most seemingly massive, solidly based pools of wealth eventually evaporate. Entrepreneurial genes are rare indeed, and no family has a heredity claim on them.

Bottom line: people get rich by working hard, innovating, and investing. The only ones who get rich at other people’s expense are bank robbers.

D
uring the 2008 financial meltdown—the stock market crash and credit crisis brought on by the collapse of the subprime-mortgage market—House of Representatives speaker Nancy Pelosi made an angry speech placing the blame for the disaster squarely on the shoulders of the rich: “On Wall Street people are flying high, they are making unconscionable amounts of money. They make a lot of money, they privatize the gain, the minute things go tough, they nationalize the risk. They get a golden parachute as they drive their firm into the ground, and the American people have to pick up the tab. Something is very, very wrong with this picture.”
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Pelosi’s outburst on the eve of the first vote on Congress’s bank bailout was driven by election-year politics. Nonetheless, it reflected a view of free enterprise shared by critics and cynics on both left and right—that free markets essentially “privatize the profits, nationalize the losses.” To them, 2008’s financial Katrina was just one more example of the perils of capitalism, where people, propelled by greed, heedlessly and callously enrich themselves at the expense of others.

Such an explanation may resonate with those who have seen too many Hollywood movies about corporate America, with cartoonish portrayals of demonic corporations and greedy Wall Street villains. But it bears no resemblance to what happened in the Real World.

As we have pointed out, the most extreme economic downturns usually take place after government intervention ends up distorting markets. The subprime meltdown was not the result of runaway capitalism and the greedy machinations of “rich people.” It was the result of well-intentioned government interventions—including some intended to help poor people—that ended up wreaking havoc in the housing and financial markets.

Most people fail to fully appreciate the roles of the two “government-sponsored enterprises” at the center of the debacle—Fannie Mae and Freddie Mac. We have discussed their activities in preceding chapters, and we will be returning to them again. We explained in
chapter 1
that the mission carried out by Fannie and Freddie originated with government during the Depression. Fannie was a government agency created to boost the resources of banks to enable them to lend more and thus increase homeownership. Freddie Mac was a Fannie clone created in 1970. Alan Reynolds of the Cato Institute explains that the two corporations themselves did not provide mortgages: