Inequality III - a natural state of affairs

reprinted from July 23, 2004

Over the past two days, I granted that it can feel uncomfortable to live in a society with great economic disparity. Those of us with money may feel guilty, and those without may feel envy and resentment. There's a lot of relativity in those feelings; I've had poorer young people visit the modest house I once owned, and, to my surprise, describe it as a "mansion". When you're used to sharing a bedroom, separate bedrooms seem luxurious. When you're used to cramped rooms, a big open room seems castle-like. Other visitors would have pitied me for not having air conditioning, a second bathroom, fireplace, or some other amenities common in southwest Minneapolis.

All of that still leaves the question of whether there IS some solution to inequality, which is perceived by many as a serious social problem. Although I'm short on traditional "credentials", I do have considerable life experience at a wide range of economic levels. Over my lifetime, I've watched as U.S. economic "classes" have become more "stabilized". By stabilized, I mean less movement from one "class" to another. I see poor people who are more likely to remain poor, middle-class people more likely to remain so, and a stable affluent class. There are some who fall from one class to a lower one, but there are clearly fewer people climbing from one class into the next higher.

That "stability", or confinement, depending on what you want, is certainly an effect of graduated taxation that discourages us from increasing our income, omnipresent regulation that discourages innovation and entrepreneurism, and welfare programs that force income from class to class.

What characterized our nation's period of dynamic growth was precisely the unencumbered movement upward from lower to higher classes. America became known as a place where the poor had an opportunity to achieve wealth. Rags to riches stories abound in our history. It was spectacular, and that opportunity for upward mobility attracted immigrants by the millions. They didn't come here for security, welfare, or charity. Most came from more controlled, stagnant nations where there was little opportunity to improve their lot. Most voluntarily took a step DOWN, just for the POTENTIAL to move up.

In a free, uncontrolled economy, there will always be extremes of wealth. That is not only perfectly natural, but it is the optimum scenario for everyone, not just for the wealthy. In an uncontrolled economy, the poor look to the wealthy as someone to emulate, and believe that they can achieve the same. The disparity, combined with the freedom to achieve, attracts and drives the poor into the struggle upward. The U.S. was such a great example of that. Successive waves of immigrants arrived, each beginning in serious poverty, and working their way upward, replaced by a new wave of immigrants at the bottom.

There is no better environment in which to live than a free economy, regardless of where you start on the economic ladder.

Most of us have been taught that it was just that uncontrolled economy that led us into the Great Depression, massive unemployment. We've also been taught that it was only the implementation of welfare programs by FDR that brought our nation out of that depression. That argument is beyond the scope of this article, except to say that we've been taught wrong, and that it shouldn't surprise us. We were taught in government schools which have every incentive to teach us that government is the solution, not the problem. It is no coincidence that FDR was a bald-faced admirer of the controlled, dictatorial economies of the Soviet Union, Germany, and Italy, and implemented many of their policies during his presidency. We watched where those policies led those other nations, and we're watching the same effects here.

Common sense should be enough to tell us that opportunity and security are virtual opposites. No risk, no reward. A government that seeks to stabilize an economy through redistribution and centralized planning does just that... stabilizes most of us where we financially begin... the wealthy stay wealthy, those in the middle class remain there, and the poor get stuck at the bottom.

If we truly have sympathy for the poor, or want all of us to have more opportunity, we have to be courageous enough to stop trying to manipulate our economy and let ourselves run free. That means eliminating welfare programs, cutting taxes dramatically, and eliminating most regulations... all of which have combined to bring us to the dull, stagnant economy we're now stuck with.

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

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?