Self-Evident Financial Truths

It looks like the public debate is about to be driven to the rich vs. the poor, given the President’s decision to stir up envy to turn attention away from the disastrous Affordable Care Act.  His stated plan is to spend the rest of his term promoting what he calls “economic justice.”  The idea here is that everyone deserves some fundamental level of wealth regardless of the decisions they’ve made in their lives.  Also, that it is not fair, or just, that some people have a great deal of wealth while others have little.

The real issue here isn’t having the debate – certainly we can discuss what constitutes justice.  I would be among the group that believes justice means that those that do more to provide for the needs of others and who do prudent things with money should do better than those who don’t.  This is the basis of the free enterprise system.  It is unjust to take money from someone who works twelve hours a day and give it to someone who doesn’t work at all.  It is also unjust to take money from someone who has saved her whole life and give it to someone who has spent all of his income on trips and luxuries.  Justice is that you deserve what you earn.

Others, particularly those who use the term “economic justice,” would look simply at outcomes and declare that if there is a large difference, the person who has wealth must have gained it at the expense of the person who didn’t; therefore, the government should take money from the wealthy person and give it to the less wealthy person.  This results in policies such as highly progressive income taxes with extra tariffs above certain levels, never-ending unemployment benefits, high health insurance premiums with subsidies based on income, high minimum wages, and government provided housing, food, healthcare, phones, and childcare.  Note that under this system need is rewarded while doing things for others, and receiving compensation for doing so, is punished.  In other words, Socialism.

The issue with Socialist plans is that they ignore fundamental economic principles.  Because of this, they end up making things worse for everyone except for, ironically, the very wealthy.  (The very wealthy generally have enough wealth to continue living as they were or they have enough influence to get favors from government officials.)

Here are these basic economic principles, which are self-evident.  For any economic system to succeed, it must take them into account and build.  Ignoring them is like trying to fly by ignoring gravity.  When politicians ignore these principles it results in a fiscal mess and undesirable outcomes.   The best course at that point would be to stop and try a different approach that observed the principle.  Instead a politician’s nature is to try to make things better by enacting new policies, usually causing more problems.   It is like a person trying to clean up a mess with a dirty rag, where the more they do the worse it gets.

1.  A business cannot, on average, pay employees more than they produce.

2.  If everyone produces as much as they can, you’ll have more than if only a few people are producing.

3.  Rewarding people in proportion to what they produce will result in more production because you align their self-interest with the interests of society.

4.  Providing for people without requiring effort from them will result in a lot of able-bodied people not working.

5.  Few people will produce more than they need if there is no reward for doing so.

6.  People who gain experience and improve their skills can produce more.

7.  The more production there is, the easier it is to take care of those who cannot take care of themselves.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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