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Policies Should Promote Wealth Creation – Pacific Research Institute

Policies Should Promote Wealth Creation

What causes poverty?

That’s what North Carolina’s “Poverty Reduction and Economic Recovery Commission” — which met again last week — claims to be investigating. Specifically, the law that created the commission declares “an understanding of the causes and effects of poverty are critical in the reduction of poverty and economic recovery.”

Seems logical enough: In order to reduce poverty we must first understand its causes.

Sadly, however, the commission (comprised mostly of state legislators and agency heads) has got it completely backwards. There is in fact no cause of poverty. Indeed, poverty was the natural state of mankind for most of human history. As authors Nathan Rosenberg and L.E. Birdzell Jr. wrote in their book “How the West Grew Rich,” “If we take the long view of human history and judge the economic lives of our ancestors by modern standards, it is a story of almost unrelieved wretchedness. The typical human society has given only a small number of people a humane existence, while the great majority have lived in abysmal squalor.”

As human societies evolved over time, several nations grew wealthy while many others failed to develop far beyond the original state of basic sustenance.

Poverty, in reality, is the absence of wealth creation.

The focus of the commission’s attention, then, should not be what causes poverty, but what causes wealth and prosperity. After all, there is a reason Adam Smith titled his epic treatise “An Inquiry into the Nature and Causes of the Wealth of Nations” rather than “An Inquiry into the Causes of Poverty.”

North Carolina’s “Poverty Reduction Commission,” however, seems completely disinterested in learning how wealth creation can relieve poverty. The commission’s focus, rather, is centered on how to subsidize poverty through expanded government programs.

Indeed, the policy recommendations being discussed include a well-worn list of wealth redistribution programs such as increasing subsidies for low-income housing, increasing the refundable Earned Income Tax Credit and expansion of government health insurance programs. Such programs subsidize poverty to the extent they reward unproductive behavior, creating the perverse incentive for recipients to avoid accepting work lest they lose their government benefits.

Completely absent from the commission’s discussion are policies to actually create economic growth, jobs and increase income. Curiously, not a single word of concern has yet been raised about the money that first must be removed from the private, productive economy to finance the new or expanded government programs.

In order to truly lift people out of poverty, the commission should be focused not on expanding the welfare state, but on encouraging productive activities that will generate opportunities for our state’s poor.

After all, to paraphrase Ronald Reagan, the best social welfare program is a job.

But how can the state best promote economic growth and opportunity? As the late, Nobel-prize winning economist Milton Friedman put it, “the record of history is absolutely crystal clear; that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”

If North Carolina’s poverty reduction commission were truly interested in improving the lives of our state’s poor, they would be seeking ways to unshackle the state’s economy from high levels of taxation, regulation, government spending and wealth redistribution schemes. Rather than rewarding unproductive behavior by expanding the welfare state, North Carolina lawmakers should incentivize wealth creation and sustainable job growth.

Disappointingly, North Carolina’s promotion of a free enterprise system leaves a lot to be desired. The Pacific Research Institute’s U.S. Economic Freedom Index (EFI) is the most comprehensive and current assessment of economic freedom of all 50 states. In the 2008 EFI rankings, North Carolina came in a dismal 36th (with 1 being the most free), down 12 slots from 2004. The drop was the second largest slide of any state during that time.

The EFI’s rankings suggest that North Carolina’s poverty problems have been exacerbated by public policies that don’t square with promoting “the productive activities that are unleashed by a free enterprise system” credited for lifting so many across the world out of poverty.

The Poverty Reduction and Economic Recovery Commission will present its final report and recommendations when North Carolina’s General Assembly session reconvenes in the spring.

Here’s hoping the commission will come to recognize that the best way to reduce poverty is not with more business-as-usual wealth redistribution schemes but through policies that strengthen economic freedom and encourage job-creating productive activities.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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