The Real Reason the Rich Get Richer

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Economist and New York Times columnist Paul Krugman – a man with airy theories about everything and common sense about nothing – wrote a typical column last week.

In it he argued that Americans would be so much better off if we just emulated the Scandinavian countries and their extravagant social welfare policies.

He neglects to mention that Scandinavia has weaker economic growth, lower GDP per capita, lower after-tax incomes, lower household net worth, negative interest rates and vastly underperforming stock markets.

Of course, academics like Krugman rarely think in terms of owning a business, saving or investing.

And the one phrase you will never encounter in his columns – except in derision – is personal responsibility.

In his view, economic success is measured by the expansiveness of government, the steepness of taxation and the pervasiveness of redistribution.

It’s true, of course, that kids from wealthy families in the U.S. are more likely to wind up affluent than kids from poor families.

Is this because, as Krugman argues, “Huge disparities in parents’ income tend to translate into large disparities in children’s opportunities”?

Of course not.

Aside from free public education and a generous social welfare network, poor kids have limitless opportunities in this country.

After they finish school – or even if they don’t – they enter an economy that is the envy of the world.

(There are more job openings in the U.S. than unemployed men and women.)

What poor kids often don’t have, however, are parents who provide the social capital that would allow them to take advantage of economic opportunities.

Every child deserves to grow up in an environment that emphasizes love, responsibility, discipline, and a strong sense of right and wrong.

Beyond that, they need to understand that they are the captains of their own fate.

They may have been dealt a good hand in life. They may have been dealt a poor one.

Either way, they need to know that actions have consequences, and that success in life – however they choose to define it – is primarily the result of the choices they make.

(A good friend – a successful builder – told me he had his two sons, now go-getters in their 30s, memorize this mantra: “If it’s to be, it’s up to me.”)

When a man or woman shows up at a prospective employer’s office, the interviewer isn’t interested in how much money their parents made.

They ask them about their educational attainment and practical experience. They want to get a sense of their integrity and work ethic. They try to assess the candidates’ strengths and weaknesses. They want to determine whether they will be an asset to the organization or a liability.

None of this has anything to do with their parents’ household net worths.

Still, very few people get rich simply by taking a job, even a high-paying one. You also have to save and invest.

I have conversations with my own 15-year-old son about this all the time, generally on the ride into school.

I’ve told him that – with the exception of people with severe disabilities – every American ought to be rich.

Studies reveal that the vast majority of Americans who became wealthy followed a similar path.

They maximized their income, lived beneath their means, religiously saved the difference, invested it wisely and let the money compound over a long period of time.

“So why aren’t more people rich?” he asked me the other day.

Some people can’t work. Some can but don’t. Some work but don’t save. Some save but don’t invest. Some invest but not successfully. And some invest successfully but then can’t keep their hands off the money. (They use it to buy that new boat or take exotic trips rather than saving for these things separately.)

The truly disadvantaged, however, are those who buy into the utopian claptrap of Krugman – and others like him – who believes that race, class and gender are destiny, that men and women cannot be held responsible for their own actions, and that it is up to government to provide people with what they need, saving them the time and trouble of actually striving.

This deprives people of one of the most vital things in life: the satisfaction that results from their own efforts and merit.

Psychologists have discovered that nothing correlates more highly with the sense that you are truly flourishing than the feeling of earned success.

Yet in Krugman’s make-believe world, economic success isn’t earned or deserved. Government provides it.

I’ve never met a successful entrepreneur, businessperson or investor who thinks that way.

And they sure as hell wouldn’t want their kids believing it.

Perhaps that’s the real advantage of growing up in a wealthy household rather than a poor one.

Good investing,

Alex

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