One of the themes that the Novel prize winning economist Milton Friedman often stressed was that the political systems implemented at any time in history reflected the intellectual climate at the time. He gives the examples of when Japan was opened up to the world, the intellectual climate in the West at the time dictated open markets and free trade as the path to growing rich as taught by the free enterprise principles of Adam Smith and the United Kingdom in its rise in the 1700’s and 1800’s. Likewise when India gained its independence in 1947, its economic leaders had been trained in England by professors such as Harold Laski, who taught at the London School of Economics and promoted an economic vision of Marxism and central planning. These two approaches to economic planning made Japan a world power on the one hand and kept India mired in poverty for decades from which it is only now partially recovering on the other.

In the present day, our own intellectual climate and approach towards economic and social problems has been dominated by thinking from works such as Capital in the Twenty-First Century by Thomas Piketty. This work points out that the rich are swallowing up an ever greater share of the wealth compared to the rest of the population and helped inspire post financial crisis movements like We Are the 99%. Even if Mr. Piketty’s observations are true, and there is much doubt to that, the next question then becomes is there anything that society can or should do about it?

Many of the solutions offered by Mr. Piketty involve taxing the wealthy well beyond levels that even Bernie Sanders is arguing for. However, this has been done before.

The assumption by many is that the top tax rates in the 90% ranges are what quelled inequality in the post war years and helped lead to an economic boom. But this is a simplistic way of thinking. In reality, one of the arguments that led to even JFK cutting the top tax rate in the 60’s was his advisors notion that the 90% tax rate was a “phantom” tax rate in the sense that the wealthy almost never paid this rate. It was such a punitive rate that the wealthy would employ vast resources and schemes to avoid it at any cost. This seems to be validated in some studies that have looked at the top effective tax rate, meaning what the rich actually paid, and it wasn’t much different from the top rates today.

Politicians Versus Economists

So it would seem that the idea of a higher tax rate to punish the rich for taking more of the overall wealth is more of a political slogan for people to get elected rather than a ploy to seriously redistribute wealth. Following the ideas of economists, who look at how many of the programs which are intended to help the poor turn out in actuality, is not as popular. That is because many economists find that simplistic solutions like rent control, affordable housing and higher tax rates do not always lead to their intended effects of helping the poor as I have argued in previous posts.

In my view, we tend to follow these paths that lead to the same results of expensive housing, high taxes for some and a free ride for others because much of the media is being educated in an intellectual climate that leans towards punishing success and wealth as a solution for poverty rather than asking the question in a different way.

When I started studying economics in school, I had come from a district where the majority of students were poor. I myself was fine, I had educated parents that had taught me the value of thrift, gaining employable skills, taking risk and having a long term view. Because of this contrast between myself and many of my peers, I had a passion for understanding why some people were poor.

For many years I thought the solutions for socio-economic problems were rooted in the poor implementation or lack of effort on the part of government. But while watching an interview with economist Thomas Sowell of the Hoover Institution the other day, he completed flipped the question on its head. I will paraphrase here but when asked why people are poor, he said humans were born poor, being poor is not a new novelty. When you go back in history, most of humanity lived in poverty. Cavemen were not born with mansions and servants, they were born with little and had to go out and hunt for their food, build their own shelter etc. The question should rather be why are poor not wealthy, even when they live in some of the wealthiest societies in history today?

The Boldness to be Different

There are many instances in our past where certain peoples and minority populations were held back economically by society. In reality, for most people, the US has only been a free country for about 40-50 years and we still live with the legacy of the apartheid state which existed explicitly up until the 60’s and has been carried on implicitly in many forms since then.

This post isn’t intended to be a review of those facts, there are a number of books to catch you up on those topics if you are unaware or interested. Rather, my interest is in that despite the best intentions of policy makers and intellectuals, we still suffer from a large population of people that consistently don’t save and don’t invest in their future, be it through investing in stocks or through an education for themselves.

Rather than just taking more from the rich to give to the poor, maybe we need to be encouraging habits which bring the struggling portions of the population up in economic terms. How many times have we all heard people complain that school does not teach them basic financial literacy such as doing your taxes, saving, investing in a 401(k) or getting a mortgage?

This isn’t the basic argument posed by much in the media or in academia right now and I don’t intend to win over those readers with this post, but rather look at a potential solution to the nagging problem of wealth disparity with a different approach, mainly adjusting behavior and habits with money to be able to take part in the wealth being generated and enjoyed by the rich rather than just watching from the sidelines.

Stocks as a Starter

The easiest way to start doing something the rich consistently do is to start participating in the stock market. The fact of the matter is that the poor consistently do not participate in the wealth generation of the stock market.

To see what this has done to potentially contribute to inequality, one simply must look at the holding of stocks and wealth since 1989. As I have pointed out in many posts, the top 10% in terms of wealth in the US own almost 90% of the stock market and they have increased that share through the 90’s, 2000’s and 2010’s.

This shouldn’t surprise anyone. But take a look at the very bottom. While the share owned by the 1% increased about 31% to 17% of the market, the share owned by the 50-90% in terms of wealth fell by 50% and that of the bottom 50% fell by an astounding 80%. What this says to me is that while the wealthy were running towards stocks, the less well off seemed to be running away or just not devoting as much to stocks as they should have been to keep up with the wealthy.

Even looking at a chart of wealth over a similar time period shows that the wealth of the richest fluctuates along with the fortunes of the stock market while the wealth of those with less seems to move much more slowly.

There are some who would argue that the poor don’t have enough to save but I don’t buy this argument for the majority of people. We make choices on a daily basis of where and how to live with the money we make, even if it is a little. How many times have we heard stories of people who had humble jobs but invested in the market and became millionaires like this janitor here. It seems odd to me that many of us consistently hear stories of thrift, saving and investing on how to get rich, yet throw this knowledge right out the window in order to “live our best lives” now at the expense of being rich in the future.

Potential Solitions

One solution to this problem if you are struggling, is to take it upon yourself to learn how to save and invest. We live in a fantastic time in human history when free brokerage and fractional shares enable even poor students to own the same companies owned by billionaires such as Apple and Amazon. There are tons of free resources available online to teach you the basics of saving, the time value of money and the risk versus reward trade off in investing. Sites like Investopedia, Investor Junkie or The Wall Street Trapper offer different perspectives on the basics of getting started investing in the market. Some of these are free and some are paid, YouTube is also a great resource for free content. I still use YouTube for more advanced options techniques.

Another interesting solution to re-engage much of the population in capitalism was proposed this year by hedge fund tycoon Bill Ackman. In a note to investors he proposed that every child born in the US be given $6,750 which would be invested in a basket of index funds that could only be tapped at retirement. Assuming an 8% return over 65 years, this would be enough to make every child a dollar millionaire by the time they turn 65.

Whether it is ideas like these or financial literacy education, the tools and the ideas are already around us to lift up people from poverty. Rather than worrying about what others have, mimicking some of the things the wealthy do with their money could be one of the counterintuitive solutions to poverty and the wealth gap we now face.

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