Governments Create Poor People

What? There’s poverty in America? The latest statistics are in. The number of Americans living below the poverty line rose to a record 46 million in 2010, the largest in the 52 years since the Census Bureau has been publishing poverty estimates. How is this possible? The Great Society policies under Lyndon Johnson were supposed to eradicate poverty. Two main goals of the Great Society social reforms were the elimination of poverty and racial injustice. The war on poverty became a war on the poor. Poverty was actually dropping when LBJ announced his program. Here’s what Ronald Reagan said in 1988 about the war on poverty:

What has all this money done? Well, too often it has only made poverty harder to escape. Federal welfare programs have created a massive social problem. With the best of intentions, government created a poverty trap that wreaks havoc on the very support system the poor need most to lift themselves out of poverty: the family. Dependency has become the one enduring heirloom, passed from one generation to the next, of too many fragmented families.

Trillions of dollars were pumped into programs designed to move people out of poverty into productivity. It didn’t work. Poverty was subsidized. When you subsidize something, you get more of it. If you pay people who do not work, more people will stop working. If you pay women who have children out of wedlock, you’ll get more illegitimate births. You don’t have to have a degree in economics from an Ivy League school to know this. In fact, if you do have a degree from of our nation’s most prestigious schools of economics, you probably don’t know this.

The minimum wage is a case in point. Everybody wants to make more money. But should an employer be forced to pay higher wages? Why does government have the authority to force private employers to pay a certain wage? Where is the power to do such a thing found in the Constitution?

No one is compelled to work. If wages are low at one company, an employee is free to go elsewhere for an offer of a higher wage. Anyone is free to start a business and set his own salary level. Some workers are not worth paying the minimum wage plus Social Security, Workman’s Compensation, and Unemployment taxes, all mandated by law.

Entry-level workers are often shut out of the job market because employers do not want to risk time (training) and capital (salary) on an inexperienced worker with inferior or non-existent job skills. As a result, the lowest skilled workers find it difficult to develop the needed competence to compete in the ever-competitive labor market. “Do you have experience” is a Catch-22. Hans Sennholz points out that millions of “idle Americans owe their unemployment to this labor law. Teenagers and uneducated, unskilled minority workers are its primary victims.”1

As the minimum wage rises, more unskilled workers are passed over in consideration for employment. When an employer’s costs rise, he will search for the most skilled people to fill job openings that are costing him more by compulsion. Why should he pay a higher wage for lower skills? Unskilled black teenagers, the highest unemployed group in America, would do much better if they could compete for hard-to-find jobs by offering their services at a below-cost price. A prospective worker could approach an employer with this appeal: “I know I’m unskilled and inexperienced, but to show you that I can do the job, at minimal risk to you, I’ll work for $4.00 per hour. Your cost will be minimal even if I turn out to be an ineffective employee.” Government regulations will not allow workers to sell their services at their chosen price. Walter Williams, Professor of Economics at George Mason University, offers a helpful example to illustrate the principle and its effects:

Take filet mignon and chuck steak. Assume that consumers, holding all else constant, prefer filet mignon to chuck steak, a not too unrealistic assumption. Then the question is: Why is it, in spite of consumer preferences, chuck steak sells at all? The actual fact of business is that chuck steak outsells (is more employed than) filet mignon! How does something less-liked compete with something more-liked?

It offers “compensating differences.” In other words, as you wheel your shopping cart down the aisle, chuck steak, in effect, “says” to you, “I don’t look as nice as filet mignon; I’m not as tender and tasty; but I’m not as expensive either.” That is, chuck steak, by selling for $1.50 per pound, against filet mignon’s $4 per pound, offers to “pay” you $2.50 for its “inferiority.” Chuck steak pays you a compensating difference, which only means that it sells for a lower price.2

How could filet mignon sellers increase sales of their more expensive cut of meat? They could petition Congress to force chuck steak producers to charge more for their inferior product. Consumers, always looking for the best product at the lowest price, will choose filet mignon over chuck steak every time if their costs are equal. Chuck steak producers will not be able to sell their lower quality cut of beef if they cannot compete in the area of price. In the same way, a lower skilled worker will not be able to compete with a more highly skilled worker if price for services (salary) cannot be negotiated.

  1. Hans Sennholz, The Age of Inflation (Belmont, MA: Western Islands, 1979), 155. []
  2. Walter Williams, The State Against Blacks (New York: New Press/McGraw Hill, 1982), 40–41. []
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