UN Secretary-General Kofi Annan is calling for a global New Deal to combat poverty in poorer nations. His plan raises important issues affecting the economic well-being of people all over the world. Why are some nations wealthy and others poor? Are impoverished nations doomed to remain mired in poverty forever? Is there a way to raise standards of living in those countries?
Annan’s approach to poverty is the one that public officials used throughout the 20th century, including those here in the United States. It would attempt to alleviate poverty with governmental welfare and political intervention into economic activity, much as Franklin Roosevelt’s New Deal did during the Great Depression.
There’s a basic fallacy in this reasoning, however: it assumes that there are wealthy people to tax and economic activity to regulate. What if everyone in a society is poor and there is virtually no economic activity? How then is government supposed to tax the wealthy in order to help the poor? How does it regulate economic activity that doesn’t exist?
Let’s assume that one million people live in Atlantis, all of whom are mired in desperate poverty. No one has a net worth in excess of $100, and those who are able to find jobs receive $1 a week. Living and health conditions are atrocious. About 10 percent of the population die each year of malnutrition and starvation.
Could anything be done to alleviate the economic suffering of the people of Atlantis? Roosevelt would have said, “The government of Atlantis should enact a New Deal and tax those who have wealth and give welfare to the poor. It should enact a minimum-wage law requiring every employer to pay workers $100 weekly, and it should impose price controls on food, housing, and other necessities to ensure that the poor are able to afford them.”
Do you see the problem? There are no wealthy people in Atlantis to tax and no businesses on which to impose wage and price controls!
Annan’s answer would be: The U.S. government should tax the American people and send the money to the United Nations, which would distribute it to government officials in Atlantis, who would then give it to the poor. But Annan’s approach, of course, by-passes some crucial questions: Why are there wealthy people in the United States and not in Atlantis? What if the entire world were mired in poverty? What good would a global New Deal do then?
The crucial question is: What is the cause of wealth in a society? The answer is a counterintuitive one, and it is the solution to poverty in every nation on earth. The key to economic prosperity and rising standards of living, especially for the poorest people in the world, is: Prohibit government from waging war on poverty!
The key to economic success, especially for the average person, lies in economic liberty – the unfettered freedom to engage in economic activity, to enter into mutually beneficial trades with people all over the world, and to accumulate unlimited amounts of wealth. By trading their goods and services with others, people are able to improve their respective economic positions. And rising accumulation of private capital (tools and equipment) makes workers more productive, which results in rising wage rates, especially in a highly competitive environment.
Thus, a society in which people have greater freedom to work, trade, and accumulate wealth will always have a higher standard of living than a society riddled with governmental regulations, taxation, and welfare. That’s why West Berlin had a higher standard of living than East Berlin. And why Hong Kong has a higher standard than Cuba.
Of course, the United States has had a paternalistic welfare state since the 1930s. But are Americans prosperous because of it or in spite of it? After all, the rooster might believe that his crowing causes the sun to rise each morning, but is it so? How much better off would Americans be had their government not confiscated so much of their wealth and regulated so many of their economic activities throughout most of the 20th century?
Annan’s plan for a global New Deal is wrong-headed and should be cast onto the junk heap of history. It would lower standards of living and doom people in poorer nations to even more poverty. There is one and only one solution to ending poverty in the world: Stop government from waging war on poverty.
Mr. Hornberger is president of The Future of Freedom Foundation (www.fff.org) in Fairfax, Va.