Jan 22 2014, 9:17am CST | by Forbes
The New York Times continues its battle against people in the top 1 percent income bracket, through Paul Krugman’s latest warcry and a first-person essay from Sam Polk, an ex-Wall Streeter and recovering, self-diagnosed “Wealth Addict.”
Let’s start with Polk’s narrative. He’s a former hedge fund trader who chucked multi-million dollar bonuses to launch a non-profit organization with a wonderful mission to help low-income families fight obesity.
It’s fabulous that Polk found a meaningful life. And it’s true that many of the derivative products he criticizes are too opaque and complex for buyers and sellers. The “virtuous” origin of derivatives as a means to protect, say, farmers from weather aberrations, has morphed into something dangerous and harmful to Wall Street investors, and by contagion, Main Street. Those schemes can and should be reigned in.
Of course Polk’s free to pursue a life he finds rewarding. But it would have been fascinating to read about his recovery from “wealth addiction” while remaining inside the financial system instead of completely wrenching himself out at a young age. The irony about Polk’s switch to non-profit work is that someday he could write an equally scathing rebuke of mismanagement, cronyism and self-interest in 501c3-land. Perhaps someday he will.
And it seems he’s looking through an “either-or” lens. He’s dismissing the morality of capitalism, the realization that what he did as a trader added value to the world and lifted people out of poverty by creating wealth through efficient capital investment. Yes there are some shoddy financial instruments. But financial services firms could not stay in business if they weren’t adding substantial value.
This value provides infinitely more succor in the millennia of human history (and perhaps prevents more wars) than any government handout or NGO. Polk’s sinister portrayal of hedge fund investors and workers doesn’t acknowledge that these people are big boys and girls who understand risk. We want to encourage “creative destruction” by these high net worth folks as a way of creating value for everyone else.
Polk urges his former Wall Street compatriots to either quit their jobs or pool some of their bonus money together for charitable causes. His rhetoric echoes Krugman, who lambastes what he calls “The Undeserving Rich,” those shameless, heartless cads in the top income brackets.
Yes, plenty 1 percenters are materialistic and superficial. And it’s true, as Krugman implies, that many 1 percenters personally behave in imprudent, dirty and self-indulgent ways that don’t help the cause of social conservatives seeking to restore the nuclear family and traditional values to help alleviate poverty. But these wealthy people, through either their smarts or birthright–as a friend jokes, those who “won the sperm lottery”– create undeniable value for those below them in the income ladder. And even if we dispersed all bonuses or taxed the uber-rich to equalize median household income levels, it would be merely a drop in the bucket compared to what a well-functioning economic machine does to help life from being nasty, brutish and short.
If wealth was perfectly distributed, there would be neither the incentive nor the ability for these high-risk projects to get off the ground. It wouldn’t be feasible to corral massive levels of capital if it were equally spread across households, many of which prefer to spend rather than invest. Inequality is the tradeoff for societal progress on a sustained upward, growth trajectory.
Krugman bemoans rising tuition costs at American universities, which makes it more difficult for low and middle-income kids to get an education. But he doesn’t point a finger at the university administrators–the one percenters who overwhelmingly donate to Democrats–who jack up the price of tuition above inflation, fueled by a massive expansion of government financial aid to students without proper financial training or cost/benefit analysis of whether their chosen field matches the new, information-based economy.
A primary trigger of the financial crisis was low-income folks taking out mortgages they couldn’t afford, pushed by regulators that sought to expand homeownership to unqualified buyers. We need to empower low-income folks with a comprehensive financial education to prevent such crises from happening again.
Source: Forbes Business
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