How to make the poor not-so-poor

Tyler Cowen apparently never saw a piece of Wall Street Journal Conventional Wisdom that he didn't want to defend...

His latest post is on why "left-wingers" (his term for those who care about poverty and/or inequality) should be "supply-siders". His argument is that rich people invest in stocks, while poor people invest in bonds or not at all. Stocks tend to earn 7% in the long run, while bonds earn about 1% (after inflation). Thus, giving more money to rich people should increase the economy's overall return on investment, thus boosting the poor, right?

Well, there is the slight issue of how that return on investment actually winds up in the hands of the poor people. If rich people are earning 7% a year, why would they take that 7% out and give it to the poor, when they could leave it in the stock market to make another 7%? The only way the money gets in the hands of the poor is if someone (a company) borrows that rich person's money and uses it to hire poor people, who then receive the money in the form of a paycheck.

I'm all for things that mean more paychecks for more poor people. So if tax cuts for the rich really do lead to more businesses being able to borrow more savings and thus creating more jobs for poor people (i.e. the "trickle-down" effect), then by all means, cut taxes for the rich!

But here's something to think about. The U.S. is at under 5% unemployment - close to the theoretical limit of how many jobs we can actually have. So poor people, by and large, already have jobs, and they are still poor. The only way they are going to become not-poor is by increasing their earnings. And there are three possible sources of earnings for a poor person - wages, government transfers, and return on investment.

Traditional redistributionist policies (what Tyler Cowen likes to call "left-wing") focus on the second source. Other policies, like minimum wages, collective bargaining, and education focus on the first. But what about return on investment? Why are the poor only making 1% while the rich are making 7%? This is a question Cowen never asks.

It's not because the poor are stupid. In fact, it's the rich who are stupid stock investors - almost none of the high-paid fund managers and brokerages that manage rich people's stocks manage to beat the Vanguard 500 index fund over the long term. Stocks go up and down, but if Jane PoorGirl is willing to keep her savings in the market for 30 years, all she has to do is buy the Vanguard - which takes about two hours to do - and she'll come out with a better ROI than the average doctor, lawyer, or mutual fund manager.

But the fact is, Jane can't afford to wait 30 years. She's late on her mortgage (or her rent), late on her credit card payments, and she's got kids who can't wait 30 years for their new underwear. She could theoretically just borrow money cheaply from a bank and stick it in stocks...but let's get real here, would you lend money at 2% to a woman named Jane PoorGirl? I didn't think so.

So what can the government do about this? One idea is to help poor people not get into all that debt in the first place (Note: The fact that poor people get into a lot of debt doesn't mean they're stupid; Harvard kids tend to do the same thing). That could mean personal finance classes in public schools. It could mean free debt counseling for poor people.

Or maybe it could even mean a system of microfinance for poor families, inspired by the one that Muhammad Yunus just won the Nobel Prize for inventing in Bangladesh. The deal is: we loan you $70,000 at 1% for 30 years, if you promise to stick it in an index fund and leave it alone until 30 years is up. Boom, 30 years later, Jane PoorMiddleAgedLady comes out with a net $400,000. Then all the people on the block hear about what happened to Jane, and maybe some of them think twice about running up those credit cards. There could be other systems helping poor people start businesses (as I'm sure there are).

One problem is that, in a rich country like the U.S., the problems of the poor are treated as distribution problems - we expect Bangladeshi peasants to be poor, but we think of poor Americans as rich people who've been deprived of their rightful share. Not so. If we want to solve the problems of poverty and inequality in the U.S., we've got to focus on giving the poor the tools to compete with the rich.

But in the meantime, note that Tyler Cowen's strategy of "give the rich more money because they buy stocks" is ridiculous. That's what he gets for being a Defender of Ideas of the Conventional Kind...