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Is the US a Banana Republic?

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In his latest column “Our Banana Republic” on the New York Times, Nicholas Kristof compares the US to a banana republic. "In my reporting, I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie. But guess what? You no longer need to travel to distant and dangerous countries to observe such rapacious inequality. We now have it right here at home—and in the aftermath of Tuesday's election, it may get worse."

Kristof goes on to give some facts on American inequality: "The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976."

The fact that there's a gross inequality between the rich and the poor in America is no secret. I've been writing for years that the middle class is disappearing. The rich are getting richer. The poor are getting poorer. Kristof is right about this, and there is no arguing the fact.

The question remains. Why?

It's interesting that Kristof compares the inequality rate today to the rate in 1976. If you've been following Rich Dad for any amount of time, then you'll understand that the 70's was an important decade for America. It was in 1971 that Nixon removed the dollar from the gold standard - making it a true currency and changing the rules of money. And it was in 1974 that the Employee Retirement Income Security Act of 1974 (ERISA) was passed, paving the way for the destruction of defined benefit (DB) plans and the rise of defined contribution (DC) plans like the 401(k) - changing the rules of retirement.

It's my belief that those two changes in the rules of money and retirement are at the heart of today's inequality.

Kristof, in his column, blames the government for the problems we face today. He argues that the taxation policy of the US is at blame for inequality. To him, it is wrong that tax cuts for the rich will result in the reduction of spending on jobs. "At a time of 9.6 percent unemployment, wouldn't it make more sense to finance a jobs program? For example, the money could be used to avoid laying off teachers and undermining American schools."

For Kristof, the answer lies in the government taking more control over the economy by spending American's money for them. Apparently, it is not the people's problem but the government's. For Kristof, it's the government that will save us from our economic problems.

The flaw in Kristof's reasoning is that he believes that the very same people who created our financial troubles will also be the ones to solve them. It's true that our inequality is, in some part, the government's fault. But it is not a lack of effort by the government to create jobs that is the issue.

It's the change of rules in money and retirement in the 1970's that's the issue.

Because people still think the old rules of money apply—to go to school, get a good job, buy a house, save money, and invest in a diversified portfolio of stocks, bonds, and mutual funds—they are at a serious disadvantage compared to those who understand that the rules of money and retirement have changed.

The rich are rich in this country because they understand how the rules of money and retirement have changed. They know how to work the system. They have a good financial education.

The problem with Kristof's line of reasoning is that he believes keeping teachers employed and funding an education system that trains people to be employees is the answer. The problem is that the very same education system he wishes to fund is the one that is at the heart of the financial crisis. Our education system teaches kids the old rules of money and, in doing so, puts them at a serious disadvantage.

People are getting poorer because of what our schools teach them about money—not because those schools don't have enough money.

A better answer would be to allocate our tax dollars into a comprehensive financial education program that reforms the schools—not a program that funds the status quo.

At the end of the day, the rich who Kristof seems to begrudge are the very people who actually create jobs. The small business person is the one who needs tax relief. If they don't have it, the middle class that Kristof rightfully wants to save won't have jobs with which to enjoy tax relief.

The time has come to stop blaming the rich and to start studying why they are rich. And the main reason the rich are getting richer is because they understand how money works. For our country to grow greater and for the middle class to survive, we must teach our children the new rules of money. Only then will we prosper. Only then will our banana republic end.

Original publish date: November 09, 2010

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