WAR AGAINST THE POOR
“The regulated economy does not impede the rich who can afford accountants and lawyers; it impedes the poor by erecting a jungle of artificial barriers to economic survival!”
The questions Diana asked about profits and poverty, about capitalism and the state, deserved to be asked. Unfortunately, she got some very wrong answers. As we shall see, poverty persists not because of private capitalism but because of the world-wide infatuation with political force as the regulator of economic activity.
In South America the poor have been systematically victimized by their own governments for over two centuries. Hope for the future does not lie in some new socialist revolution, however, but in an emerging capitalism. A case in point is Peru.
In 1968 a nationalist/socialist military regime ousted the elected president of Peru and immediately expropriated the assets of U.S. Oil companies and other major segments of the economy. Capital fled the country and production plummeted. As price controls were imposed even farming became unprofitable. Food production declined so sharply that the socialist leaders were obliged to spend large amounts of foreign exchange to import food – this in a country which had been self-sufficient in food since the days of the Incas! During the twelve years of socialist rule real income dropped by 40%.
In 1980 civilian rule was finally restored but the level of state intervention was undiminished as the state continued to play its traditional role of protecting favored economic interests. Today, regulation in Peru is so pervasive that the poor are virtually excluded from legal economic activity. A Peruvian think tank called the Institute for Liberty and Democracy described what a Peruvian would have to go through to establish a clothing business: He must first negotiate a morass of 310 legal steps, and then, in the absence of previous experience or political connections, he must work 40 hours a week for over six months and pay eight crucial bribes before his business could be officially registered. Confronted by such “barriers to entry,” Peruvian entrepreneurs today ignore the legal economy en masse to engage in a wide variety of flourishing underground enterprises. Today, two out of three urban workers in Peru are thus employed. In describing the ILD study Claudia Rosett provided a fascinating glimpse of private capitalism at work in the underground economy of Peru in 1984:
In some areas, the informal economy even seems to be more efficient than the legal sector. The market test of this efficiency is the awesome amount of underground business carried on profitably, without government planning or aid. Illegal buses provide 85% of Lima's public transportation, and illegal taxis provide 10% more. Underground activity accounts for 90% of the clothing business and 60% of housing construction, including relatively sophisticated structures up to six stories high. Underground entrepreneurs assemble cars and buses, build furniture and make high precision tools. When underground earnings are taken into account, per capita income may be closer to $1300 a year than to the official figure of $900
As Ms. Rosett concluded, 'The real private sector is the underground where businesses compete without special privileges .... it is clear that the people of Peru have already chosen a market economy, without foreign interference, and despite the hindrance of their own government. What remains to be seen is whether the Peruvian government will honor that choice.”1
For the most part, it did not. With vast spending and the debt to finance it, the country was soon wracked by hyper-inflation. Recovery has been at best intermittent. In 2010 the World Bank rated Peru fourth in the world in the relative size of its underground economy: at an astonishing 59%!
But the problem is not the Peruvian people or the evil United States; the underlying problem is the world-wide fascination with ever-expanding government as the solution fo every problem. But in Peru, the underground economy is actually the free market! Diana and her friends should have supported an even more revolutionary idea: the unfettered capitalism of the marketplace!
THE THIRD WORLD
Nowhere has the impotence of political force been demonstrated more consistently than in the Third World countries of Asia and Africa, many of which have been ruled by doctrinaire socialists since independence with uniformly wretched results.
While the market-oriented economies of Japan, Taiwan, S. Korea, Singapore and Sri Lanka continue to flourish, the socialist countries continue to languish - and our own government, through a vast array of foreign aid programs, simply adds to the problem by placing money – and therefore power – in the hands of precisely the most reactionary element of these societies, the entrenched political leadership. In his book THE ECONOMICS AND POLITICS OF RACE, Thomas Sowell comments on the perverse influence of “foreign aid” in the 1980s:
“Foreign aid” is in fact often used by Third World governments to (1) acquire arms to be used principally in suppressing political critics and movements within their own country; (2) persecute racial and ethnic minorities, especially those who are more economically productive or entrepreneurial, such as the overseas Chinese; (3) cover deficits caused by the inefficiency or irresponsibility of the recipient government, thereby enabling it to remain in power longer by insulating it from the consequences of its own actions ....
Tanzania is a striking example of the effects of international wealth transfers through multilateral agencies. It has received more “foreign aid” per capita than any other nation. Its output per worker has declined 50% over a period of a decade; it has turned from an exporter of maize to an importer; nearly half the more than 300 companies expropriated by the government (”nationalized”) were bankrupt by 1975, with many of the remainder operating at a loss. As the economy has declined, government bureaucracy has grown by 14 percent per anum, doubling in less than a decade. Tanzania's ruler, Julius Nyerere, has repeatedly been unopposed in “elections,” and his political prisoners run into the thousands – many tortured, according to Amnesty International. International wealth transfers to the Nyerere regime have not proved to be “foreign aid” to Tanzania.(2) 2
Many people today choose to blame the West for Third World failures, and in a limited sense, the charge may be justified: For decades, foreign aid has been subsidizing socialist failure. As Prof. Nicholas Eberstadt has noted,
The public in the U.S. And other Western countries must face this awful reality honestly and squarely. The West is, at present, directly complicitous with Africa's rulers in the results they inflict upon their subjects. No change in rationale for aid, no new names for programs, no optimistic pronouncements about policy changes in the near future will alter this fact. 3
THE UNITED STATES:
Diana chose the wrong villain, and many in this country continue to make the same mistake. Whether in Peru or the U.S., the enemy of the poor is not the institution of private property, but the institution of political force. In the U.S. we have moved away from private capitalism, based on voluntary exchange, toward political capitalism, a system ordered and influenced by the state in behalf of this or that favored group. But for every beneficiary of government intervention there is a victim, and the most consistent victims are the unorganized poor, as the following examples will illustrate:
Professional groups insulate themselves from competition by a jungle of legislative restraints. Consider the case of legal secretary Rosemary Forman of Jacksonville, Florida, who for 20 years had been offering cut- rate legal assistance for standard procedures such as divorce, adoptions, wills, etc. Where lawyers were charging $300 or so for these services, she was charging around $60. She explained in a 60 Minutes interview, “If you want to pay for a lawyer's three-piece suit, Gucci shoes and styled hair, live it up.” But the Florida Bar Association was not amused and brought suit against her for practicing law without a state license. When she ignored an order to “cease and desist,” she was charged with contempt of court and sentenced to four months in jail and a $2500 fine. She was finally granted clemency – but only on condition that she close down her office. The Florida Bar can now breathe easy – but the poor have now lost a source of inexpensive legal help.
Another example: skilled and experienced midwives are willing and able to provide inexpensive care to those who desire it – but in California and in many other states medical interests have prevailed upon legislatures to outlaw such services. The explanation, of course, is that such restrictions “protect the public”; the outcome, however, is that the poor person who is unable to afford expensive hospital care may end up with no care at all. Retail druggists achieve restrictions against less expensive mail order suppliers; undertakers acquire legislative roadblocks to cremation; optometrists, teachers, dentists, barbers – every group imaginable – all enjoy the privileges of state-enforced monopoly. And the expense falls most heavily, of course, upon the poor. Labor unions, whose monopoly position is also enforced by law, hurt the poor coming and going: by excluding them from work on the one hand and by driving up the cost of things on the other. Two decades ago Mayor Ilus W. Davis of Kansas City during the 1960s observed that “It's easier for a Negro to be invited to a garden party at George Wallace's home than to get into a plumber's union in Kansas City.”4 - and in many American cities things haven't changed much since then.
But trade unions do not merely restrict blacks, they restrict everybody: by arbitrarily limiting membership they limit competition, and the artificially imposed labor scarcity – even in the face of general high unemployment – pushes building costs out of sight. In addition, unions bitterly oppose cost-cutting building techniques – and government backs them up. For example, the Supreme Court once upheld the “right” of a union to bar the use of factory pre-hung doors. But the contractor who tries to escape such union restraints does so at his peril: the least he will encounter is harassment by a union-dominated city hall. If that does not suffice, destruction and mayhem at his construction site may be next.
The minimum wage law is another example of special-privilege legislation which works to the profound disadvantage of the poor. In response to the demands of organized labor, politicians of both parties scurry to endorse minimum wage legislation in spite of its adverse effect on the marginal worker who finds himself priced out of a job entirely. The minimum wage is a major cause of high unemployment among black teenagers; Milton Friedman once called it “the most anti-Negro law on our statute books.”5 Paul Samuelson, at the other end of the political spectrum, has come to the same conclusion: “What good does it do a black youth to know that an employer must pay him [the minimum wage] if the fact that he must get that amount is what keeps him from getting a job?6 Thomas Sowell writes,
A growing number of studies by independent academic economists all over the country has shown repeatedly that minimum wage laws increase black teenage unemployment. By lobbying for such laws, labor unions price these youngsters out of the job market and there by preserve their own wage scales, all in the name of “humanitarian” objectives. Somebody among the black leadership has to say, out loud, that their young people are idling away on street corners for the greater glory of the AFL-CIO – regardless of how much the NAACP or the Black Caucus in Congress are in hock to George Meany and Company.
It is of course much easier to blame black teenage unemployment on “racism” but then it would be hard to explain why their un- employment rate was only a fraction of its present level (and no different from white teenage unemployment rates) back in 1950, before the minimum wage law spread its coverage and began a series of escalations. Was there less racism then? We all know better.7
The evidence is overwhelming that the minimum wage hurts the poor, but have no doubt which way the politician will vote: labor unions have the political clout; the poor do not.
One of the great myths of our time is that the poor are net beneficiaries of government activity because they escape the taxes which pay for it all. On the contrary, the poor are the hardest hit by all taxes. A corporation tax, for example, is simply a disguised sales tax passed on to the consumer, poor as well as rich, in the form of higher prices. Another passed-on cost is the heavy expense of government regulation: Dr. Murray Weidenbaum of Washington University once calculated the added burden at around $2200 per year for a family of four. So who is the real beneficiary of all this government activity? One clue: the two richest counties in the U.S., by family income, are Montgomery in Maryland and Fairfax in Virginia, the two “bedroom” counties for Washington, D.C. It's not the poor who benefit from the vast array of federal largess as much as the affluent bureaucrats who administer those programs.
One characteristic of this nation's economy in the past has been its “upward mobility” - the unobstructed ease with which even the poor person, if he so desired and had the ability and determination, could enter the economic mainstream through some kind of independent activity. Young Cornelius Vanderbilt, to take an extreme example, started out with neither connections nor capital nor education, yet was able to create a vast and profitable empire in shipping and in railroading. And for every Vanderbilt tens of thousands of others were opening restaurants or grocery stores or shoe shops or newsstands or barber shops or whatever. If a person had something of value to offer little would prevent him from offering it. Today, however, upward mobility has been vastly impeded by pervasive government. Rules, regulations, inspections, restrictions, orders, decrees, taxes, licenses, fees, uncertainties and red tape all heavily weigh the scales against the poor person trying to break into the world of independent economic activity. Consider the case of Isis Brantley, of Dallas, Texas:
Isis Brantley operates a shop which specializes in African hair-braiding, an art Isis had learned from her mother from the aqe of six. But in 1997, seven enforcement types, including undercover agents, entered her place of business and arrested her for braiding hair without a cosmetology license. She was fined $600.
She obtained the hair-braiding license, but because she also offered classes in hair-braiding, there was more, as described on the WALL STREET JOURNAL Law Blog:
In 2012, Texas officials told her that unless she got a barber instructor's license, the students who took her classes couldn't legally work as hair-braiders. While she had a license to braid hair, the state said her business itself didn't comply with barber-schools regulations. And to get licensed, she would need to install at least 10 workstations - equipped with reclining chairs and no fewer than five sinks - purchase barbering texbooks, and relocate to a space more than twice as big.
Ms Brantley refused and instead, [with the support of the pro bono Institute For Justice] sued in Federal Court, claiming the rules violated her constitutional due-process rights. This week, a federal judge in Austin ruled in her favor, declaring the rules unconstitutional. U.S. District Judge Sam Sparks in Austin on Monday said the Texas hair-braiding school requirements fail to "advance public health, public safety, or any other legitimate government interest."
The judge said he was troubled by the fact that lawyers for the state couldn't come up with a single example of a licensed Texas barber school that specializes in African hair-braiding.
Judge Sarks wrote that there was a "logical disconnect inherent in a scheme which contemplates the existence of hair braiding schools but makes in prohibitively difficult for a hair braiding school to enter the market in hair braiding instruction."
A spokeswoman for the Texas Department of Licensing and Regulation told the Associated Press that her agency "respects Judge Sparks; decision." 8
Cosmetology is bad enough. Barbering regulations are even more burdensome - expecially for the poor. Let us suppose, for example, that a person in a poverty area saw the need for a low-cost barber shop: One might suppose that with a few hours' practice, a $15 set of clippers, a chair and a willing customer, he could go into business. Then, if he were industrious, and were truly able to provide a service of value to his neighbors, he would prosper. Perhaps one day he could open a bigger shop and hire two of his relatives. That is the way things are supposed to be in a “land of opportunity.” But that is not the way things are. In California, this is what the law says he must do:
The first step for an aspiring barber is a barber's license granted by the state Board of Barber Examiners. But this requires either 2-3 years as an apprentice working for someone else or 1500 hours (!) at a state-licensed barber school at a cost of around $7000 for the 1500 hour course. (The poor person has already been severely hampered in entering this trade, but let us continue anyway.) Then, it costs $134 to register for the state test. And then, if the test is passed, there's another $37.50 for the two-year state license. But there's still more, for the new shop must now be inspected and approved by the Board – for a fee of $57.50. Then, a city business license for $30 per year and up. Then the new shop (assuming it opened at all) would be subject to periodic snooping, not only by the Board but by the city Health Department. And, of course, state and federal business taxes must be computed and promptly paid – or else. Now, assuming he were still in business, suppose the new proprietor hires an assistant: Deductions, contributions and fees must be accurately computed and paid. Just for starters there's Worker's Compensation, a compulsory injury insurance policy paid for by the employer with premiums sent directly to the insurance company. Then, State Payroll Withholding, including Unemployment Insurance and Disability Insurance (SDI). And then state Income Tax. These levies are withheld by the employer and then forwarded to the state on a quarterly basis.
Then comes Federal Payroll Withholding, the largest of which is Social Security (FICA) 7.65% matched by the employer. Then, of course, we have the Federal Income Tax, again collected from the paycheck and sent in by the employer.
The employer has now become an unpaid tax collector - even for only one employee. The disincentive to hire anyone at all should be obvious.
The paperwork for all this would represent a severe burden even for people with a fair degree of schooling; to the person with only a meager education and perhaps only a scant familiarity with the mysteries of bookkeeping, these artificial barriers to business survival are simply overwhelming. But there is still more: most states enforce – or try to enforce – minimum price schedules. But a poverty area shop forced to charge these inflated rates would go out of business in a week!
Just about every kind of business activity is subjected to the type of obstructions, burdens and harassments mentioned above. In New York City the Haas Act of 1937 required a "medallion," a permit, to operate a taxicab. The cost was $10. But because the number of medallions was restricted, over the years the value of these medallions had soared to around $60,000 in 1970, and today, these near-priceless medallions are advertised on the internet for an unbelievable $600,000 and up, This government-created monopoly has excluded from the legal taxicab business all but the wealthiest corporate operators. In contrast, the license fee in Washington, DC, is under '$125, and as Professor Walter Williams observes 9 most of the operators are black.
Every enterprise imaginable – dry cleaning, trucking, beauty parlor, grocery store, restaurant and on and on – is today under the thumb of the bureaucrat and the politician. And let us not suppose that the controls are merely “on paper,” for an army of bureaucrats will assure that every regulation is adhered to and every assessment paid. Just ask Isis Brantley.
For those who already have capital, experience and education, the numberless “barriers to entry” erected by the state can be overcome, but to the under-capitalized poor, often with little experience and scant education, these barriers are virtually insurmountable. It is worth considering that young Vanderbilt, who was poor and nearly illiterate, and had neither connections nor experience, would very likely find it impossible, simply because of the suffocating influence of government, to get a start in business today!
The distinguishing feature of the regulated economy is protection by the state of established economic interests. As a result, the rich, insulated from potential competition from below, tend to stay rich. And the poor tend to stay poor. But the problem arises, it should be clearly noted, not because the economy is free, but because it isn't.
1. Claudia Rosett, "How Peru Got a Free Market Without Really Trying," WALL STREET JOURNAL, Jan. 27, 1984.
2 Thomas Sowell, THE ECONOMICS OF POLITICS AND RACE (William Morrow and Co., 1983), pp. 239-240.
3 N. Eberstadt, "Helping Hand Won't Solve Africa's Problems," WALL STREET JOURNAL, Sept. 17, 1986.
4. FORTUNE, Dec. 1968.
5 "Let's Not Raise the Minimum Wage," FORTUNE, July, 1972.
7 Thomas Sowell, "Racism, Quotas and the Front Door," WALL STREET JOURNAL, July 29, 1978.
8 WALL STREET JOURNAL Law Blog, Jan.8, 2015.
9 Walter E. Williams, RACE AND ECONOMICS, (Hoover Institution Press, 2011) p 64. Also, "Put the Brakes on Taxicab Monopolies," WALL STREET JOURNAL, June 11, 1884, Op Ed page.