Recently there has been much ballyhoo amongst the chattering classes regarding the growing disparity of wealth between the rich and poor in the United States. Even traditionally conservative writers, such as our own Joe Armendariz, seems vexed by the growing gap in wealth between the residents in the northern and southern portions of Santa Barbara County. While all these pundits and armchair philosophers who decry the wealth disparity situation are intelligent and well-informed people, I am beginning to believe that they either do not know, or have somehow forgotten, how capitalism works.
One of the pervasive characteristics of capitalism is that, left to its own devices, it persistently, over time, concentrates the wealth of the community into an ever-shrinking minority of its members. This has always been so, even during the heyday of trade unions and redistributive taxation policies. It is just one of the embarrassing and unfortunate prices we pay for the otherwise efficient distribution of goods and services, and the apparently ever-improving general quality of life, that capitalism has demonstrated its ability to provide.
Allow me to provide a simple example of how wealth concentrates. Rather than use banks and corporations and innovative entrepreneurs as an example, I will bring the illustration down to one of its simplest forms. Imagine a young couple in the late 1970s, freshly married and just starting out. They both come from middle-class or high-paid working-class families and therefore both enjoyed the privilege of some form of post-high school education. They get moderate middle-class jobs either in the construction trades, health care industry, financial services industry, education, government, or government-funded defense industry. They postpone having children, save some money and, with the help of their parents, purchase their first home.
Ten years goes by, a couple of children are born, and opportunity for higher income calls them to another community. Rather than selling their home, they rent it out and become long-distance landlords. They are liberal-minded and charge below market rent, interested in only covering their costs of mortgage, taxes, utilities and upkeep on the rental home. They have jobs and do not need to derive disposable income from the rental property. They even get a tax break. After five or six years, by living modestly, they save enough money to buy a home in their new community. Life goes on.
Twenty years on, the rental property mortgage is paid off. The rental property has been effectively purchased for the couple by the cumulative rent over that time. All the renters who have lived in that home have been people who are financially unable to buy a home. Consequently, the rent they pay goes to pay off the mortgage of the home they rent. Wealth is transferred from the renters to the owners of the home. In the meantime, the home appreciates in value, thus multiplying the value of the wealth transfer. Once the rental property is debt-free, it continues to produce income for the couple and allows them to pay off the mortgage of their primary residence sooner than planned, thereby decreasing the amount of interest they had to pay and decreasing their housing costs. So, the renters of the rental unit cumulatively paid for two homes. The wealth of these relatively poorer people was transferred to the couple and even perhaps paid for the higher education of the couple’s now adult children.
Meanwhile, due to the reduction in housing and education costs because of the rental income, the couple was able to save and invest in their retirement, and do not need to liquidate the equity in their real estate holdings in order to live in modest comfort in their older years. The real estate equity gains in value until it is worth perhaps 10 to 15 times its original value at the time of their passing, when it is transferred, tax-free, to their surviving heirs.
One hundred percent of that wealth was transferred from relatively poorer people to relatively richer people. Likely, the couple will die believing that they provided shelter for a fair price, a legacy for their children, and never even think about the wealth transfer from the poor. That is how capitalism works.
Of course, with this example in hand, you can easily imagine how it works on a much larger scale. Banks borrow money from the wealthy to lend to the poor at interest, and the poor pay and the wealthy get wealthier. PG&E, Southern California Edison, Southern California Gas, and San Diego Gas & Electric are monopolies that are guaranteed by the California Public Utilities Commission to make a profit; so, they are safe investments for the wealthy. People who cannot afford to purchase utility stock pay utility bills, and their wealth is transferred to people who are able to afford utility stocks. I am sure that you get the picture.
I am not passing judgment on capitalism. I have not done that since I was a 21-year-old political science major in college. It is what it is, and it has its benefits. We are sort of stuck with it in any case, as China and Russia discovered after a lot of painful experimentation with alternative ideas. However, we should not be shocked that without strong trade unions and wealth-distributive taxation policies, wealth concentrates and wealth disparity grows. That is just the way capitalism works.
