I’ve been thinking about the whole distribution of wealth thing and I begin to wonder if it is really a problem. What happens when Alex Rodriguez gets paid $25 million dollars a year? (I pick him because I know his salary)
I have heard arguments that if we tax the rich too heavily they will not be motivated to compete – in my mind, there’s no difference between $25 million and $20 million a year – both are more than I can spend so why would I work harder to earn more money if I am already drowning in the stuff. Then I realized something – these guys probably learn really fast how to spend more money than I can imagine because they have it. If I’m making $2 million a month but I have managed to acquire $1.8 million a month in expenses and I can see another $400,000 a month that I could spend my money on, then I am going to be motivated to try to earn $2.2 million a month.
What I realized is that the very wealthy are spending large amounts of money and that money provides work for the rest of us. If someone buys a mink coat for $100,000 dollars I might say that no coat is worth that price, but where does that money go? It does not go into the fur – it goes into the economy. It arrives in the accounts of the store that sold the coat, but then it is used to pay bills, sales commissions, coat makers, mink farmers, mink food producers, etc. Someone will complain, “but they don’t spend all of it, some of that money goes to corporate profits.” Corporate profits are used to produce more goods, pay investors, or expand businesses. For those who want to argue that “investors” tend to be the already wealthy I reply that they are busy spending their money one way or the other. Those people who would hoard their wealth eventually die and pass it on. Somewhere down the line it will still get spent – and there’s no need to worry about the detrimental effect of hoarding – even if Bill Gates were to sit on all his Billions (as if most of his money were not already tied up in charitable causes) it would hardly even register on our national economy.
When someone argues that there is a problem with some people having more wealth than others they do so with an assumption that there is a limit to how much wealth is available. Even if that were true (and I’m not sure it is) that is only a problem if there is not enough wealth to provide for everyone. We all know very well that there is plenty of wealth available to meet the basic needs of our entire society with much to spare.
Wealth is not about cash, it is about cash flow – to be wealthy all you really need to do is flow less cash out than in. Because of the flowing nature of wealth we need not worry that someone else has it, all we have to do is find a way to the waters edge by producing something that others find valuable enough that they flow cash through us. In fact, the worst thing that could happen economically is to set up a system which gives some people incentive to not produce anything.
Bravo! Excellent analysis, David. You’re quite right that others’ wealth can be made to benefit you and me by our own industry (and indeed it does – you and I only get paid because someone out there who has some wealth can make more of it by employing us).
That said, my primary complaint with socialistic wealth-redistribution programs has nothing to do with economics, but is tied to ethics. I have no personal right to forcibly take another’s property. That’s called theft, stealing, plunder, etc. That being the case – since I have no right myself to forcibly take the property of another – I cannot rightly delegate that authority to another. Our government takes it’s authority from the governed. Our government is comprised of delegated authority from our people, and acts (I should say, ought to act) as though it has no more rights or authority than any of it’s people. If our government acts to forcibly transfer the property of one person to another, for any reason, that act is theft, stealing, plunder. The simple fact that they have made it legal does not make it ethical or just. Property can not be involuntarily taken from a person without a crime being committed, whether it is through welfare, social security, medicare, or any other social program. They are all leagalized plunder.
I refer any interested readers, and especially you, David, to The Law by Frederick Bastiat, a 19th century economist and philosopher. It was originally published as a pamphlet, so it’s relatively short.
Sorry, trickled on economics still doesn’t work.
If your goal is to stimulate our economy then the tax cuts have to be given to those that will most likely spend the money in our economy. The problem is that the wealthy are taking the tax cuts we gave them and using the money to invest and live in other countries where our economy gets zero benefit.
And Jason it isn’t stealing by the government, taxes help pay for all the things that have helped you be successful. Try being successful in a country with no legal system, no monetary system, no law enforcement, no roads, no schools…the list could go on and on. Taxes pay for everything in this country that help the wealthy be wealthy but then they turn around and want to complain about taxes day and night.
Marshall,
First, I’m certainly not arguing against taxes – just wealth redistribution programs. I agree with having a legal system, schools, etc. provided by the government. What I am opposed to are laws that allow one person or group to take from another that which is not rightfully theirs. Read the pamphlet I linked to (The Law) in my previous comment, and then come back and argue against what Bastiat calls legalized plunder – government modifying the law to allow it’s forcible taking of property for any reason.
Second, if wealthy individuals take their dollars and invest them in other countries, what do the people in those other countries do with those dollars? They have to spend them where the dollar is currency – America. If they don’t want to spend their money on American goods and services, they trade with others who do. Eventually, any dollars spent in other countries come back. The idea that spending American earned money overseas is somehow a loss to America is a fallacy. The money will always come back.
Jason,
Thanks for the link. Interestingly it is not the economics that I am concerned with here any more than the ethics. The thing that concerns me (whatever the economic and ethical results) is the perception of scarcity that drives the desire for wealth redistribution. I think I will have to post my thoughts on scarcity sometime. I call it the Law of Abundance.
Marshall,
You raise a good question – what is our goal? I could argue that our economy is not the limit of my concern. In fact, my concern is the social implications of putting too much stock in cash – which has no real value, only assigned value – and in the idea that we do not have enough to meet our needs, or that we can solve poverty through government programs.
Poverty is a mindset as much as a lack of property – I know because I lived in the poverty mindset for years and the mindset did not change at the same time that our family income finally exceeded $10,000/year. The mindset cannot be changed by government programs and therefore those programs cannot be a lasting solution.
Imagine what would happen if every person worked in our country? We would produce more goods and services than we need but more importantly – work is good for a person emotionally. If every person were gainfully employed our society would be a better one even if our economy were suffering. Our crime rate would go down because there would be less boredom and desperation. (Please note that lower crime does not necessarily mean zero crime – I am not arguing that all crime is a result of unemployment.)
Marshall,
One other thought. When the wealthy invest in other countries they do not abandon their money, they still control it and eventually it will come back here (like the hoarding idea I included in the post). As for when they choose to live in foreign countries – first, America is not a prison so it is their right to leave; secondly, what about all the people from all over the world who come to visit us here and add to our economy – it’s not a one-way street transaction.
I can’t agree more. I think the two big myths are as follows.
The natural state of money earned by the wealthy is static.
The natural state of money earned by the poor is dynamic.
A good book I’d recommend on this subject is “Economics in One Lesson” by Henry Hazlitt. It’s available as a free e-book here(pdf).
Thanks for the link Tyler – I now have two new books on Economics to read.
I have read Bastiat and you could argue his points both ways, corporate welfare is the same as regular welfare (except a corporation can’t starve to death) but somehow Republicans turn their brains off when it comes to redistributing our treasure to the corporations. Imagine if every corporation and person in our country worked without a government handout, we might even be able to balance a budget.
And Jason’s statement about dollars is completely false, dollars can be exchanged for whatever currency the person desires. They don’t have to be used in America. And I could care less about other countries. I don’t want my taxes helping other countries, I don’t pay taxes to help other countries, I pay taxes to benefit the good ol’ U.S. of A. (probably the most un-liberal thing about me but that is how I feel)
And one other thought, the whole point of giving the wealthy tax cuts is to get the multiplier effect of them investing in our economy, that doesn’t happen when they invest in other countries. Sure they might still control the money we gave them in a tax cut but it isn’t doing anything to help our economy. Might as well be called welfare for the wealthy because that is what it is.
And every year we pay higher taxes and higher interest on this debt because people think blindly giving the wealthy more tax cuts will work when it doesn’t.
I’m not quite sure how it can be considered redistribution when we are simply not taking to money from those who earn it in the first place. Of course this assumes that the corporations are not being subsidized by the government. I understand that that it often not the case – but it should be the case – there should be no redistribution of wealth – not top-down, nor bottom-up.
I actually had to re-read my original post. I had not intended to be talking about tax cuts, but I recognize that it sounds as if I am. I was really trying to challenge the assumption that Tyler pointed out – that “money earned by the wealthy is static.”
I’m sorry that you keep paying higher taxes every year – my taxes (as a percentage of income) have not increased – I must be rich. I do agree however that the massive debt that our government has incurred with decades of reckless deficit spending is a problem that will continue to grow even if we don’t actively increase the debt – unless we start getting it paid off. Those who are fiscally conservative need to start talking about that more. Using the logic of Bastiat – we cannot collectively maintain a permanent debt load any more successfully than I can individually maintain a perpetual debt load.
By the way – Jason’s comment about dollars was true. I don’t know anywhere in the world where the dollar does not have to return to the U.S. We can exchange the dollars for any number of other currencies, but the man who gives me euros for my dollars has to do something with dollars I gave him – even if he just gives the dollars to someone else who spends them here. Even if merchants in other countries will accept dollars as payment they must exchange those dollars for the local currency before they can spend their earnings unless they spend the money by purchasing from a U.S. enterprise.
Marshall,
I think David did a good job of responding to your latest comment, so I won’t argue most of it. What I would say is that I agree with you about Republicans or Democrats giving benefits to the wealthy or to corporations. I’m with David on this – the government should not be sponsoring or subsidizing or favoring any businesses.
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I thought I should counter what Marshall said.
A tax cut is not something that the government gives to people. It is a reduction in the amount of money that a government takes away from people.
BTW, I think that there are problems with the centralization of wealth in this economy. However, centralization of wealth is generally an effect of the growing centralization of political power. Big government tends to centralize wealth.
When you look at the history of governments, you find that the overriding concern of big government is to protect the assets of the politically and economic empowered.
If someone were to strategically decrease the size of the government and removed the protection of the wealthy, we would see the gap between rich and poor diminish.
Thanks for the comment Kevin. It think that the way tax money is viewed by different people varies greatly. People who favor smaller government see the money as belonging to the people and as such a tax cut is always the best use of any tax surplus. People who favor larger government feel that the government has an inherent right to use any money in the economic system of the nation to provide any service that it deems necessary and anything that the government does not use to provide services to the people is a lucky break for those with the most money.