Tuesday, January 4, 2011

Income Inequality and Redistribution: A March Towards the Old Soviet Union

One of the left wing's economic voices wrote today that re-distribution is essential to have the economy recover. The idea is that if one looks at the ratio of highest income to average income then at some point the economic rate of growth reaches a peak and then declines.

Namely the assumption is that more money goes to the very wealthy and that they somehow are stashing it away somewhere so as to be non-productive. That means that the very wealthy have found some Shangri La for investments which has no nexus to the US economy, yet manages to get returns, perhaps they are stuffing the money into Mongolia, yak farms?

This economist states:

Inequality is already high, and if it continues to grow it could reach the point where it becomes morally intolerable, and there is evidence that social ills grow as inequality widens. But there is an economic reason to care, as well.

There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive – the most unequal distribution of income imaginable – will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.

But somehow one wonders if there is any truth to this. The really rich still live here if they are paying the alleged low taxes and thus must be spending or investing via some let us assume legal vehicles.  These folks think that Government is a wiser investor of capital, that the smarts that allowed people to make the money somehow are redistributed to some GS 9 in DC after they get it and that the GS 9 can be more adept at placing it for economic return. Why should the person who made it be allowed to decide where to invest it?

Somehow the mindset of these economists is without any understanding of the entrepreneur. The ivory towers of academe are without any touching point with reality. These are the same folks who got us in the mess we are in now, and they want more. Knowing that an opportunity is there to be had is what drives innovation.

If you get just a medal from the GS 9 in DC then you are back in the Soviet Union. What good are medals as rewards, to academics perhaps, but not to those creating the true value in society.