Inequality II - what keeps us unequal?

reprinted from July 22, 2004

In Inequality I - why redistribution won't fix it, I described why attempts at leveling incomes don't work. It's also important to face some facts that explain why the incomes of poor people tend to stay fixed. A relatively poor person spends a high percentage of their income on consumables. We eat and buy a few necessities... housing, clothing, utilities, and little else. Our earnings are in circulation, and we contribute to the economy, but we really don't add much to the growth of the economy. What I spend doesn't go far toward keeping others in their jobs. If our income increases some, the increase isn't likely to change what the money goes for. We may move to better housing, eat better, or buy a few more conveniences, but we're likely to still spend all we earn.

By contrast, an individual or family with a higher income is more likely to invest rather than spend more on consumables. Most people, once they've reached a comfortable lifestyle and taken care of neccessities, don't usually continue to escalate that lifestyle much as their income rises. They have the opportunity to put their extra money to work EARNING for them, perhaps allowing them to work less to maintain what they have.

It's estimated that there are now 3.5 million millionaire households in the U.S., expected to rise to 5.6 million next year. That's 3.5% of the population, but you probably couldn't spot most of them, because most don't live ostentatiously. Their needs are satisfied, and they have, and recognize that they have, the luxury of putting their extra money to work for them rather than simply spending more.

Certainly, I've generalized, and there are many individuals who don't fit these patterns... poor people who still manage to save and invest, and wealthy people who blow all they have, but, as a generalization, there is a significant difference between the consuming poor and the investing affluent. When we take money from the affluent and give it to the poor, we unquestionably reduce the amount of investment capital available. The result is depression of our overall economy... fewer new business start-ups, less research and development, fewer and less desirable jobs.

The inescapable truth is that redistribution reduces opportunity for all of us. The average wealth will be lower than it would have been without redistribution.

Who can benefit most from a dynamic, growing economy? We all benefit, but those who have the most important potential gains are the poorest of our working-class citizens. To the extent that we undertake redistribution, we harm everyone involved, but cause the most harm to those we are trying to help. The affluent may not be personally harmed to any great extent, but the recipients will not gain.

Psychologically too, the money that does trickle down to welfare recipients is not the same as money earned:

Lottery winners, trust-fund babies and others who get their money without working for it do not get as much satisfaction from their cash as those who earn it, a study of the pleasure center in people's brains suggests.

"When you have to do things for your reward, it's clearly more important to the brain,"' said Gregory Berns, associate professor of psychiatry and behavioral science. "The subjects were more aroused when they had to do something to get the money relative to when they passively received the money."

We appreciate what we've earned. We're also less likely to waste it, because we know the price we paid for it. Most of us have experienced some sort of unexpected windfall... a bonus, an inheritance, etc. There is a natural tendency to spend it on something we wouldn't purchase out of our earnings. Welfare encourages those same attitudes... attitudes that tend to KEEP welfare recipients on the dole, and we've watched as redistribution programs have had that effect on recipients, creating families with generations of members with a decreasing chance of escaping the hopelessness of welfare.

I'll close this section with one of my favorite quotes... favorite because it's true, but because it's also so revealing of political hypocrisy. Despite his comment, President Roosevelt, more than any other, forcibly started this nation on a path of decay... through welfare programs.

The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual disintegration fundamentally destructive to the national fiber. To dole our relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. The Federal Government must and shall quit this business of relief.

Franklin Delano Roosevelt, State of the Union 1935

Tomorrow: Inequality III - a natural state of affairs