WASHINGTON, January 26, 2016 — Democratic presidential candidate Bernie Sanders claims that the system is rigged so the rich get richer, the poor get poorer, and those in the middle don’t have a chance. Although policies implemented by President Obama have created an environment where the wealthy are gaining and the middle class is falling behind, it is not the system that is rigged.
Rather, this administration’s current economic policies have created the false perception of a rigged system. Bernie just doesn’t understand the system.
Sanders says that he will break up big banks, overtax the greatest contributors to the economy and increase transfer payments to low and middle-class income earners by providing them with free healthcare, free college education and a higher minimum wage.
He claims this will reduce income inequality by taking income away from those who have earned it and giving it to those who for whatever reason have not earned it.
In reality, as we have seen over the past seven years, policies like this will rapidly make income inequality worse, not better. Such confiscatory policies will, in fact, slow economic growth, reduce opportunities for all Americans and increase the perception that the system really is rigged.
In a recent campaign ad, Sanders said,
“If you’re doing everything right but find it harder and harder to get by, you’re not alone. While our people work longer hours for lower wages, almost all new income goes to the top 1 percent. My plan: Make Wall Street banks and the ultra-rich pay their fair share of taxes, provide living wages for working people and ensure equal pay for women. Together, we can make a political revolution and create an economy and democracy that works for all.”
Just because a person works hard doesn’t mean his or her income should increase. Suppose a worker produces blank video tape. No matter how hard that employee works or how much more he or she produces, the price of the product keeps falling primarily because of the declining demand for videotapes. The value of that worker’s output falls.
Instead, workers must learn to acquire skills that will allow them to produce output that does have value. Giving them something for nothing, raising the minimum wage or increasing welfare and other income transfer programs removes incentives to acquire new skills that will increase the value of the output.
The demand for manufacturing workers continues to decline because products can be manufactured at a much lower price in other countries. While this is a great benefit to American consumers, it reduces demand for manufacturing workers in the U.S. So even if these workers become more productive, the value of the output they produce declines, which explains why their wages are falling. The admittedly difficult solution is to enable these workers acquire new skills so they can contribute to producing output that has value in the marketplace.
Wanting to overtax the highest income earners is another example of Sanders’ lack of understanding of our American economic system. In order for our economy to grow, it needs more of two basic inputs: labor and capital.
Since the labor force participation rate is at historic lows under current administration politices, the input from labor is also declining, making the input from capital more critical for growth.
New capital is created when people earn income, pay taxes and then save most of the rest of their income rather than spend it. On average, middle and lower income earners spent more than 96 percent of their after-tax income. High-income earners spend a much, much lower percent and save the rest to create new capital for the economy. By overtaxing the high-income earners, their after-tax income drops. Most likely they spend about the same but that leaves less saving and less new capital creation.
With less labor and less capital, it is impossible for the economy to have a sustained period of solid growth, which is exactly why the economy has grown at an anemic rate of just over a 2 percent for the last six years.
Sanders wants to break up big banks. There is no logical reason to do that in spite of his rhetoric. Such an action would, in fact, harm large companies’ ability to grow since they need very large banks to assist them in handling their financial needs.
Sanders’ policies are exactly opposite of what the U.S. needs today. He says he believes the system is rigged. The truth is that the system is not rigged. Even with the unfriendly to growth economic policies of the current administration, the American dream remains alive and well. It is the individual’s responsibility to figure out how to make a valuable contribution to the economy. In a growing economy, once that happens, the opportunities are endless, something Bernie simply cannot understand.
*Cartoon by Branco. Reprinted by arrangement and with permission from Comically Incorrect.