On this episode of The Impatient Investor, Andrew discusses why habits cause the rich to get richer while the poor just get the status quo. The best way to lift up the poor is not by punishing the rich, who will take their jobs elsewhere, but by educating the poor on how they can become rich.
“There are habits ingrained in the rich that set them apart from the poor and contrary to popular belief, it’s not because they exploited the poor. Redistributing wealth to the poor will not lift the poor because it doesn’t change their habits.”
Today, we’re going to talk about why the rich always get richer and the poor get the status quo. This is a great quote that we’ve all heard. Give a man a fish and you’ll feed him for a day, teach a man to fish, and you fed him for a lifetime. That’s an old Chinese proverb.
Some politicians love to jump on the tax the rich bandwagon to fight income inequality. They want to redistribute the wealth, but beware it’s your wealth they want to redistribute. We all know politicians are a bunch of hypocrites. They spout about climate change at conferences they took their private jets to attend. They talk about income inequality, but none of them live it in their personal lives. Take the 2020 presidential candidates for example, nearly all were millionaires with two, even being billionaires. Yet not one of them gave away more than 5% of their income to charity, 0ften lagging average Americans in the same tax brackets.
There are two ways to address income inequality. One either bring those at the top, down to the level at those of the bottom or two lift the ones up at the bottom to the level of those at the top. Politicians are all about the first approach. Instead of viewing taxes as revenue necessary to fund government functions, such as self-defense and infrastructure taxes are considered a tool to redistribute wealth. I’m not sure that’s what our founding fathers intended.
The problem with politicians is that many of them never started or owned a business. Many were academics, lawyers, and for some politics is all they’ve ever known. People who have never owned a business, don’t understand the sacrifices and struggles to be a successful business owner, and that’s why it’s easy to paint business owners as exploiters of the poor, getting rich at the expense of those less fortunate.
It’s easy for politicians to tell business owners they didn’t build that, meaning their own business. They want to take credit for what you built, and they want to accuse you of stepping on the poor on the way to the top. What politicians don’t get is that it’s the business owners who create the jobs for the poor. They don’t get that if you punish the rich, it’s the poor that will pay the price. What happened when Seattle imposed a $15 minimum wage on businesses downtown? Low-margin businesses like restaurants moved out. Who paid the price? Workers who lost their jobs. Punishing the rich will not make the poor better off. It will only confine them to the status quo. And that’s because the rich will always be wealthy. They will always find a way to make money, no matter how much you tax them. They’ll allocate their capital to more efficient uses.
There are habits ingrained in the rich that set them apart from the poor and contrary to popular belief, it’s not because they exploited the poor. Redistributing wealth to the poor will not lift the poor because it doesn’t change their habits. The poor are poor because of habits and no amount of redistribution will change those habits. Education, opening up opportunities on the other hand will go a lot further in teaching the poor the proper habits to become rich rather than simply handing them money.
A 2016 article in the Guardian.com profiled one Nobel Laureate in economics who would agree that punishing the rich is not the way to lifting the poor. The report profiles Christopher Pissarides professor of economics at the London School of Economics who told the world economic forum annual meeting in 2015 in Davos, Switzerland, that citizens worldwide suffer extreme inequality, but punishing people on high incomes is not the answer. “I don’t think taxing high incomes and simply taking the money and passing it on, or transfers to lower incomes can work in today’s open globalized world,” said Pissarides, who won the Nobel prize for economics in 2010, said in a briefing on income inequality. According to Pissarides, governments should combat inequality by using tax revenues to create jobs rather than redistribute money from the rich to the poor. Redistribution takes away the incentive for lower-skilled people to acquire skills and go into the labor market. He argued and created disincentives for higher-earners to stay in the country, work hard and look for new ventures to make money. Pissarides was entirely on point. You punish the rich they’ll go somewhere else to get rich while taking jobs away from the poor. The poor aren’t better off, on the other hand, if you educate the poor and give them jobs and opportunities to lift themselves up, that seems like the only practical way to address income inequality.
Here are the differences in habits between the rich and the poor and why helping the poor adapt the rich habits will go a lot further and advancing their stations in life other than just giving them handouts. The rich save and the poor spend. The rich never spend more than they make, the poor spend more than they make by acquiring debt. The rich trade money for time by seeking out passive income opportunities that make them money while they sleep. The poor will always trade time for money if they don’t find alternative passive income sources. The rich think long-term, saving and planning for their financial futures. The poor think short-term, many never planning beyond the next paycheck. The rich make investment decisions based on data, projections and economic fundamentals, the poor speculate treating the stock market like a casino. The rich don’t follow the crowds. They don’t let emotions and what’s hip or trending on social media influence their investment decisions. The poor are easily swayed and follow the crowds often driven by FOMO or the fear of missing out.
Wouldn’t it be more effective to lift up the poor by educating them on how they can be rich instead of continually bombarding them to message that being rich is bad? Why would they even want to be rich? There’s no incentive too, and that’s why punishing the rich will only take away from the poor who pay the price when the rich take their jobs elsewhere. Habits are why the rich always get richer and the poor always get the status quo.
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