We paid a high price for false remedies for inequality

WEDNESDAY, MAY 23: In 1776, Adam Smith in one of the most important books ever written, “The Wealth of Nations”. One notable quotation reads:

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”

The short answer to my question from last week as to why does Bermuda, together with most of Europe and North America, no longer suffer from the terrible famines and diseases so rife in the recent past, and why are we immeasurably much better off than countries in the Third World, is answered by Adam Smith is that we are the fortunate beneficiaries of the free market (if your wish to praise the system) or capitalism (if you wish to disparage the system).

Since the industrial revolution of 250 years ago, the standard of living in the Western world has soared to levels unimagined by our ancestors.

The Western culture of savings and investment, hard work, study, intellectual and political freedom, deferred gratification, and the rule of law have produced a degree of prosperity and greatest freedom to human beings.  All of this occurred in the last 250 years, and very little in the other 49,750 years of man’s recorded existence on earth.

Today, even the poor in Bermuda enjoy a standard of living that would have been the envy of an 18th century King of France, or of someone today living in Burkina-Faso. 

Colour television, motorized transport, air conditioning, foreign travel, and so much food that obesity is more of a problem than hunger. Take electricity for example; it is taken for granted that every Bermuda home enjoys electric power. Less than 80 years ago, in the United States, then the richest country in the world, nine out of 10 farm homes were without this necessity.

What is meant by poverty today in Bermuda is two-fold.

Compared with the very recent past — say 5 years ago — many people through no fault of their own (or to be precise because of government mismanagement)  are having a tough time making ends meet. In short, within a short period of time Bermudians are much worse off.

Neighbours

Compared with many of their contemporaries who dine out, belong to swanky golf clubs, live a big houses, travel first class to Europe and so on, too many Bermudians are no longer enjoying a prosperous life.

We do not compare ourselves to our ancestors, and we do not compare ourselves to people who live in other parts of the world.  We compare ourselves to our immediate neighbours.

Some are even subjectively deprived as one writer put it a century ago “It is part of man’s nature never to be satisfied as long as he sees other people better off than himself”.  This I suspect is what Bermudians think – they see many wealthy people, and think I am being deprived from my rightful share of wealth that is created in Bermuda. 

Only five years ago we were the richest people in the world, we had the best economy in the world, and almost everyone had a style of life than was admired by everyone else.

But for many, especially the political classes, the gains were believed to be distributed unfairly and unjustly.  The rich got richer and poor got, if not poorer, at least in relative terms less wealthy than the high flyers in international business many of whom were non-Bermudian. 

PLP politicians were sincere about making it possible for less affluent Bermudians to earn more and to participate in the obvious prosperity that abounded.  Their actions however were guided by a poisonous sense of entitlement and envy. They honestly believed that because their motives were good, the ultimate outcome must also be good.

How wrong they were.

The underlying strategy was to redistribute wealth and to bring about financial equality.  In the minds of many politicians it was not poverty in Bermuda that was the problem, but the evil of inequality — especially that which existed between the black and white population. Economic inequality was considered to be immoral, and government has an obligation to remove it, and by God that is what they were going to do.

False remedies for removing inequality are infinite in number.  Income tax the main lever elsewhere was not an option although increasing the payroll tax was considered to be a winner.  This was increased in 2010 (later reversed in 2011) from 14 per cent to 16 per cent of payroll (an increase not of 2 per cent but a savage increase of 14.3 per cent) and the upper limit for exemption was raised.

One of the settled propositions of economics is that when the price of something is increased, less of it will be demanded.  This applies as much to jobs as it does to apples or eggs. Employers looked at their payrolls, calculated the higher taxes and decided they could do with fewer employees.

A second false remedy was to say that non-Bermudians had to leave Bermuda after six years of residence. Anyone who has run a business will tell you that people with more 6 years of experience are a lot better than people with less.  

Many employers took the sensible way out — they shipped jobs off when the six-year period of residence in Bermuda was reached. It was not understood by government that non-Bermudians created jobs for Bermudians — they did not steal them. 

Both polices were a signal that job creators were not wanted.  As a consequence, the number of jobs fell and many positions which were dependent on the activities of those who were expelled from Bermuda simply disappeared. Firms which employed 50 employees or more shrank to a fraction of their former selves.  There was also a knock-on effect on restaurants and stores as customers moved to other locations.

These two short-sighted actions happened to coincide with financial troubles in the USA and Europe and what would have been something of a difficulty morphed into a major problem.  Jobs by the score disappeared like ice on the beach in July, secondary business activity like bars and restaurants felt the cold wind, and houses and apartments were no longer needed for people who had been given orders to get out of Bermuda.

The obvious conclusion is, that fewer jobs means greater poverty.

Government had failed to understand, yet again that economic policy requires an ability to recognise secondary consequences of any financial actions. It requires an ability to trace the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run. It also means looking at all the consequences of a policy instead of merely resting one’s gaze on what is immediately visible, and to see the problem as a whole, and not in fragments.