Protecting the Rich

All across America there are millions of people who live in the underground economy, fearful of the government.  Thousands of them are people who are unable to pay legal bills, and face jail time if caught:

More than a third of all states now allow borrowers who don’t pay their bills to be jailed, even when debtor’s prisons have been explicitly banned by state constitutions. A report by the American Civil Liberties Union found that people were imprisoned even when the cost of doing so exceeded the amount of debt they owed.

Sean Matthews, a homeless New Orleans construction worker, was incarcerated for five months for $498 of legal debt, while his jail time cost the city six times that much. Some debtors are even forced to pay for their jail time themselves, adding to their financial troubles.

In contrast, when wealthy people like Donald Trump go bankrupt, they are allowed to keep many of their assets and obviously don’t go to jail.  Here are some other ways that the system in America is rigged to favor the rich:

1.  The poor are often jailed for drug crimes, while people like Rush Limbaugh get off scot-free.  Or go into “rehab.”

2.  The government allows big banks to borrow money (via deposits) at T-bond interest rates, due to government promises to repay the debt if the bank fails.  The poor borrow from loan sharks.

3.  The government shovels vast sums of money into healthcare, as they pick up the tab for Medicare, Medicaid, the VA, and even much of the cost of “private” health insurance.  But they don’t regulate costs, allowing medical suppliers like doctors and big pharma to earn large incomes (by international standards.)

4.  In addition to the medical subsidies, they severely restrict entry in medicine, allowing American doctors to earn far more than doctors in other countries.

5.  They also restrict entry in law, and as if that isn’t enough, they set up tort laws in such a way that lawyers can skim massive profits from routine class action lawsuits.  Meanwhile, there are no barriers to entry into picking peaches in the hot Georgia sun.  That’s a “free market” in labor.  The American dream.

6.  In my field (higher education) they heavily subsidize spending, allowing me to earn a higher salary and lower teaching load than in a free market.

7.  They have patent laws that give monopolies to the inventor of a product.  But not just major new products with social externalities like the internet, or semi-major ideas like social media, but slight tweaking of existing platforms such as social media.  This allows vast profits to be earned in knowledge-oriented industries that are winner-take-all and near-zero marginal cost of production. These rules also funnel vast sums into the finance industries that funds high tech companies, and the investors who pick the winners.

8.  People who own auto dealerships are protected from competition from direct sales from auto companies.

I’m sure there are many other ways the rich are favored, these are just a few off the top of my head. And note that while I oppose many of these government policies (although not the one that let Limbaugh off scot-free) the question of whether the policies are justified has no bearing on whether the system is rigged to favor the rich.  The system may be rigged for justified reasons or unjustified reasons.  Maybe we need strong patent laws.  But it is most definitely rigged to favor the rich.

Many on the left favor superficial palliatives like higher minimum wages and taxes on capital, which would do little to solve the problem and indeed would do more harm than good.  The term “radical” originally meant getting to the root of the problem.  That’s what I favor, but clearly both Democratic and Republican politicians don’t agree with me.  They both protect the rich.

Over at Econlog I did a post arguing that the rich really were highly productive.  This was in response to Piketty’s claim that their wealth was mostly unmerited, as (he claimed) people like CEOs earn far more than they contribute to a company’s bottom line.  I think this productivity claim is wrong; CEOs are very productive if we measure productivity in terms of a company’s bottom line.  On the other hand the social productivity of many of the rich is far less than their private productivity.  He may be right about “merit,” but for the wrong reason.

Oddly, this means that my critique of modern American capitalism is far more radical than Piketty’s.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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