Afghan children Malik, 8, and Popal, 11, wait at a roadside with wild tulips for sale to potential customers driving through the Shamali plains, north of Kabul. SHAH MARAI—AFP/Getty Images

Here's How You Help the Poor Without Soaking the Rich

Apr 18, 2014

We have to clear our minds of a fallacy about poverty alleviation: Helping the poor does not mean welfare. This isn’t to say that we don’t need welfare. Ignoring the unfortunate who can’t put enough food on the table or afford proper education or healthcare is not just cruel, it’s bad economics. The impoverished make either good consumers or productive workers.

But government aid can only reduce the suffering of the poor; it usually can’t make them escape poverty permanently. We know that from watching what has happened in the developing world over the past half century. Those countries that have tried to use wide-scale state programs to alleviate poverty—such as India—have not achieved results as quickly as nations that did not, such as Singapore and South Korea. (See my recent piece on this subject.) Generally, the high-performance economies of East Asia didn’t fight poverty by playing Robin Hood—soaking the rich and handing out cash to the poor. There is no reason why we’d have to do that today.

Instead we have to give the downtrodden better jobs, more opportunities, more tools to improve their incomes and fairer treatment in economic policy.
That means we must improve the climate for investment. I’m pretty sure you didn’t expect me to write that when you started reading. There is a widespread assumption that what’s good for companies is bad for the little guy. But if Asia’s example teaches us anything, it’s that there are two ways to end poverty: (1) create jobs and (2) create more jobs. The only way to do that is to convince businessmen to invest more.

That’s why it is imperative to make investing easier. We should press ahead with free-trade agreements like the Trans-Pacific Partnership to bring down barriers between countries and encourage exports and cross-border investment. Though CEOs complain far too much about regulation—the sub-prime mortgage disaster, the recent General Motors recall, or Beijing’s putrid air all show that we need to keep a close eye on business—we should also streamline regulatory procedures, standardize it across countries and thus make it less onerous to follow.

We also need to improve infrastructure like transportation systems to bring down the costs of doing business. I think it is a national embarrassment for the U.S. to allow the Highway Trust Fund to run out of money at a time when the country needs both jobs and better roads. The environment for investment shouldn’t just improve for Walmart and Apple, but also entrepreneurs and small companies. In many parts of the world—in certain European countries, for example, and China—there’s too much red tape involved in starting a company, and not enough finance available.

We also need to invest in the workforce. U.S. Senator Marco Rubio, in an attack on a proposed minimum-wage hike, said that “I want people to make a lot more than $9—$9 is not enough.” He’s right, but that just won’t magically happen on its own. To get people’s paychecks up, workers have to possess better skills. We are simply not doing enough to improve schools, teachers and job training programs. We should also be doing more to make higher education more affordable.

While overall U.S. spending on education is among the highest in the world, it still lags in important ways. Take a look at this data comparing education spending across countries. U.S. public expenditure on education has remained more or less stable, at 5.1% of GDP in 2010, but that’s lower than a lot of other developed countries, from Sweden to New Zealand. What is also interesting is how the cost of education is pushed onto the private sector in the U.S. much more than in most other countries.

Spending is also heading in the wrong direction. The U.S. Census Bureau calculated that in fiscal 2011, expenditure per student dropped for the first time since statistics have been kept.

Clearly, the U.S. spends so much money on education already that we should be getting more bang for our buck. Reform is crucial to put all those billions to better use. But slicing spending isn’t the answer, either. The latest budget from U.S. Congressman Paul Ryan streamlines some U.S. education programs he considers wasteful and recommends measures that would add to the financial burden of going to college for some families. Meanwhile, he’s leaving the military budget generally unscathed. Do Ryan and his colleagues believe the Pentagon isn’t wasteful? Apparently not enough to put the military on a diet.

The fact is we have the money to do more for education. U.S. federal spending is about $3.5 trillion—roughly the size of the entire economy of Germany. The problem is how we choose to spend it.

We also must restore performance-based pay. The idea that people should benefit from their hard work is a cardinal belief of capitalism, but there is ample evidence that it hasn’t held true for quite a while. Productivity growth has far outpaced wage increases in the U.S. going back to the 1970s.

This appears to be a global phenomenon. The International Labor Organization (ILO) looked at 36 countries and figured that average labor productivity has increased more than twice as much as average wages since 1999. Some have disputed this argument, but we can’t deny that wages are going nowhere. According to the Bureau of Labor Statistics, real weekly earnings in the U.S. in March were a mere $1.82 higher than a year earlier. Generally, workers are losing ground to capital globally. The ILO has shown that wages’ share in GDP has decreased in recent decades, meaning that the regular worker isn’t benefiting as he should from economic growth.

There are many factors behind this trend, including the formation of an international labor market. But globalization itself isn’t the problem—it’s how the benefits are being allocated. Corporate management doesn’t seem to care so much about shareholder value when paying themselves. Professor Steven Kaplan noted that in 2010 the average CEO of a major U.S. company earned more than $10 million, or about 200 times more than the typical household.

Companies also have the money to raise wages: They just choose not to give it to their employees. Rating agency Moody’s recently reported that U.S. non-financial companies are sitting on $1.64 trillion in cash. Companies also spent $476 billion buying back their stock in 2013, 19% more than the year before.

The question is: How get management and shareholders to disgorge more corporate profits to their employees? There isn’t an easy answer. William Galston, former advisor to President Bill Clinton, once suggested tax rates should be linked to a company’s worker compensation strategy (though that strikes me as a bit too intrusive). The ILO recommends we support stronger collective bargaining to allow workers to fight for their fair share of corporate profits.

But the crux of the problem is the idea of shareholder value. How do we convince shareholders and management that higher wages are positive for the long-term prospects of their corporations? Maybe we should consider altering the way we tax capital gains. Rather than breaking them down into two main categories—short and long term—it might help to decrease the rate the longer the asset is held. That would encourage longer-term shareholding, and perhaps make owners more interested in the long-term outlook for the companies in which they hold shares. I also think we should rebalance tax rates between capital and labor. I understand the principle that low capital-gains taxes reward people for wise investments. But what about rewarding people who work hard at their jobs every day? The Organization for Economic Co-operation and Development noted in a report this month that the tax burden on wage earners has increased in most of its member states in recent years.

These are just suggestions, and I’m interested in hearing more of them. The basic point is that we have to take steps to improve both the outlook for corporations and the many ordinary employees who work for them. The game should be win-win, not zero-sum.

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