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Sunday, April 27, 2014

Income Inequality and Reality

Is income inequality a bad thing?  In the current swirl of articles about the latest economist du jour, Thomas Piketty of France, this is a subject which is rarely debated.  Piketty wants to get rid of the super rich by imposing extremely heavy taxes on them which will simply confiscate their wealth.  The goal is not to fund government activities, but to eliminate the rich as a group.  But the question remains:  is this a good thing.  Indeed, is this even a fair thing to do.  Should someone who works hard and has talent or some special ideas not be rewarded for that?  Should those movie stars who have the ability to draw millions into theaters not get to keep their high salaries?  Should Bill Gates and his partners who founded Microsoft not get extremely rich when this business behemoth prospers?  Should the inventor who creates some newly patented idea that changes the world for the better not get huge rewards for what he or she has done?  Should the entrepreneur who creates a new business that soon employs thousands of people not reap the rewards of what he or she has done?  In simplest terms, does that result make sense?

The frequent subject of discussion when the subject of income inequality is raised is that America ought not have a huge number of people with inherited wealth who become the American aristocracy.  These would be the wealthy with no special skills or talents, the folks whose wealth was made by daddy or mommy or even by their grandparents.  That argument, however, is one that does not really address the issue of income inequality.  The vast bulk of the super rich in America did not inherit their wealth.  More than 85% of the richest folks in the land made their own way in the world.  Oh, there are some who inherited money from their parents and then made fortunes from that cash.  Donald Trump is a good example of that sort.  And there are others who helped their parents grow the fortune in the first place and then inherited it.  The Waltons are a good example of that group.  But there are very few people among the super rich who are there strictly because of inheritance.

The lack of super rich folks who inherited their money is the result of three important factors: 1) there is a dilution of wealth as parents leave money to many children and to others as well; 2) inheritance taxes take a big chunk of estates, a payment that can be lessened with good planning but not eliminated; and 3) consistent inflation over the years makes sums that used to be extraordinary into amounts that are no longer that impressive.  These effects do not force the children of the super rich into poverty; that is obvious.  After a few generations, however, the families in question are no longer super rich.

So we have to return to the basic question:  is it a bad thing to reward success?  This is not a question that can be answered in a vacuum.  It is related to all sorts of other questions.  For me, the most important such question whether or not elimination of rewards for success will lower the income of the rest of the country.  If there are no super rich, how many people will lose their jobs?  If there are no super rich, how many industries will close down?  If there are no super rich, how many institutions that they support will be disrupted.

It is worth keeping in mind what has happened in the past when the wealthy were eliminated.  Think of the Soviet Union.  In the 1920s when the Soviets had finally gained full control of Russia, they confiscated all land and all of the means of production.  In simplest terms, the government took control of all wealth in the country.  People with big mansions in Moscow or Leningrad were suddenly forced to live in one room and tens of others were moved into the building to share.  Farmers were "collectivized"; in other words local farms were aggregated into collective farms on which all worked.  The first net effect was to eliminate income inequality.  There was no inequality because everyone, EVERYONE was poor.  Indeed, not only was poverty widespread, so also was starvation and other sorts of privation.  In the first twenty years of Soviet rule, an estimated 15 million citizens of the USSR starved to death, but, at least, everyone was equally hungry.

So I ask again:  is income inequality a bad thing?  Or, is income inequality the result of an economic system that results in growing incomes for all Americans?  The incomes of all Americans grew steadily for over sixty years following the Depression even though income inequality grew during the last 35 of those years.  Then came the last five years.  Since the start of the Obama presidency,  we have seen a decline in real household income of roughly 10%.  The policies followed by Obama and the Federal Reserve have all been designed to reward those with assets.  Not surprisingly, the result has been a major growth in income inequality.  Think about it.  When interest rates are kept low and the availability of bank loans is restricted to only those with superior credit, it helps those who are already rich.  A person with substantial assets can get a loan to start a new business while a person without assets is out of luck.  People who save their money see no reason to put the funds into bank accounts or bonds since the return on those investments is so low.  (Many money market funds pay less than 0.1% -- that means $100 in interest each year on savings of $100,000.)  The result is that folks put their savings into assets that provide a better return, mostly the stock market.  All this extra buying flowing into the stock market means that the price of stocks goes up.  So who does that help?  Of course, the answer is the people with lots of stock-- the rich.  So we have the spectacle of a president and a party that attack income inequality in their speeches while simultaneously following policies that promote income inequality. 

There is much more that has to be examined on this subject.  One thing, however, is certain:  income inequality is something worth examining, but it is not the issue of importance that the latest barrage of articles would indicate.  An America in which the average household has a growing income and a comfortable life but which has some super rich folks is, by far, preferable to an America where everyone is equal but poor.  The goal of our policies ought to be a growing, vibrant economy which provides benefits to all.  We ought not lose sight of this fact as the latest Marxist push for equality gets promoted by the left.




 

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