Inequality I - why redistribution won't fix it

reprinted from July 21, 2004

Spurred by offline challenging from a reader with excellent questions, I think it's appropriate to examine one of the serious misunderstandings concerning a truly free economy... about "redistribution" as a mean of "correcting" economic inequality. There is a widespread belief that only government controls have kept, and can keep, a free economy from resulting in a society of great economic disparity... with many very wealthy and many very poor citizens... the "haves" and the "have-nots".

The very idea of some people living in poverty alongside others with great wealth does seem offensive, doesn't it? We're all similar working humans, and it seems reasonable to hope that there would be some semblance of economic equality. It's not difficult to see and appreciate the hard work of some of our poorest citizens. For the large percentage of our population who have professional or office jobs, we may be relieved that we have both nicer work and higher incomes than our poorer neighbors. We may feel uncomfortable having to face the fact that, compared to our poorer neighbors, we are the "haves". Perhaps with a little guilt, we feel that it would be nice if we could just do a little "leveling" of results, bringing the "bottom" levels somewhat higher.

Those aren't bad feelings. Most of us like to see others become more successful, or at least to rise out of whatever we consider "poverty". To be honest, though, most of us are also fairly competitive, and aren't crazy about others passing us by on the way up the economic ladder. Some (few, I think) actually relish the idea that there are others inferior to them on an economic scale.

The urge to "redistribute" some income from those who have "too much" to those who have "too little" comes, I've noticed, primarily from two kinds of people:

1. Individuals who feel economically comfortable.
2. Individuals who feel like they're not getting what they "deserve".

There is, however, a rub with the first group; they want most of the redistribution to come from others... from those who have more than they do. They're not necessarily excluding themselves from a little income loss, they just want those above them to shoulder most of the load... especially those they think of a "filthy rich". The relative economic position of these folks would improve from redistribution, by dragging down those above them.

There's a bit of a rub with the second group as well; their desire for redistribution (toward them) seems to be based on their belief that they're just WORTH more than they've been able to get others to pay for their services. They HATE the market that doesn't value them enough. Not by coincidence, they tend to be people that employers view as a pain, either because they're recalcitrant or malcontents. I've been known to fit into that category myself (I can sense some readers' heads nodding)... unwilling to just silently obey orders... but I've always been willing to suffer the consequences myself rather than expect special treatment. I've been fired several times, with justification.

You may have also noticed that people who propose redistribution of wealth seldom use themselves as an example... they don't talk about how it would help them (even if it would)... they use other, poorer folks as examples, because it's important to them to be thought of as caring, selfless people. Redistribution is always supposed to help someone else, at the expense of those who have more than they need.

Who does redistribution cost?

Those in favor tend to think that it really won't "cost" anything. Most of the funding will come from those who really have more than they need, and they won't even miss it. Worst case, the rich will have to do without a few luxuries, and the poor can really use it.

There's some basic economic truth that isn't at all obvious when we're considering redistribution on an emotional level.

1. MOST of us would be in permanent poverty without jobs.
   
2. Jobs require employers who are able to hire us.
   
3. Employers require investment and profit in order to hire.
   
4. Investment money comes from people who have more than they spend.

Although employee unions would like to pretend otherwise, our economy depends on investment. Companies raise money almost continually, for such things as new tools, maintenance of old tools, new construction, expansion, additional employees, etc. They borrow money and pay it back out of profits, or sell new stock.

Investment money comes from people who have more money than they spend. Not all investors are rich people... some are frugal folks who live modestly enough to have some left to invest. Nevertheless, most of the investment money originates with what we would call relatively affluent people... and there's another rub... those are the people redistribution harms directly. It reduces the total amount left to invest. Less investment means less growth, more failures, and FEWER JOBS.

BUT, the redistributor protests... the poor people will spend what they receive, and that will help the economy too. There are a couple of problems with that argument:

1. Spending is not the same as investment.
2. Redistribution itself costs a lot of money.

By now, we should all know how wasteful government programs are. Each welfare program that attempts to redistribute some value from the "haves" to the "have-nots" loses a huge percentage of the money in administrative expenses. Government employees are better paid than their private counterparts, and it takes a lot of them to verify eligibility and eventually get the remainder into the hands of recipients. Redistribution simply wastes money, quite the opposite of what it attempts to do.

Tomorrow: Inequality II - what keeps us unequal?