As a Libertarian I often align with liberals on key social issues (although for different reasons many time) and with conservatives on fiscal matters. One of the key components of liberal thinking in fiscal matters is that rich people have too much money and poor people not enough and it is government’s role to play Robin Hood and redistribute the money. Forget if it is fair to take something earned from someone to give it to someone who did not earn it, forget that most rich people are also the job creators or have worked hard for a lifetime accumulating their wealth, and forget that government cannot and should not be the arbitrator of fairness, does this policy work? Or is it just a convenient myth that sells well in the next election? Is it socialism? I call it the politics of envy.
Lets take a neighborhood street with 10 households on it. Each of the ten households has $1000 in discretionary income that they spend monthly on a variety of goods and services. If the government takes $500 from five of the households and gives it to the other five households, has the money grown at all? No, this street still has $10,000 in discretionary income to spend, although it now is spent/invested/or saved in a different manner. Re-distribution in this manner creates no more wealth. There are other harmful effects as well as people will change their behaviors to adjust to this new reality. I’ll include a parable later to highlight that effect.
Now assume that out of the ten households, five have $2000 in discretionary income (rich) and five have no discretionary income (poor). The government steps in and takes $1000 from each of the five and gives it to the other five. Have we grown the discretionary income at all? No, but politicians have just potentially bought five votes (although they potentially lose five votes as well).
Neither of those work too well, so there is another option. The government can take money from the next street down and give it to this street. This street now has $20,000 to spend instead of $10,000 and when they spend money the politicians can point to the spending and the jobs created/saved because of it, and prove their economic wisdom. Of course the other street has $0 discretionary spending and the jobs that they supported with that spending may now be gone. But those are unseen jobs lost, so politicians don’t have to own up to that. As an added bonus, they can reward their donors and politically connected friends. But they still could lose elections due to the hardships that they placed on the now poor street.
There of course is a better option for politicians. Make the next generation pay for it. The government can borrow the money by selling Treasuries to foreign countries, large institutional investors, regular investors, or even it’s own bank. Now both streets have $20,000 to spend, no one has had money taken away from them, and jobs have been created! This has actually worked for awhile, but now just like those in debt with credit cards, the party is over. This debt interest is adding up to some real money and if we don’t pay it, people might not lend us anymore money. Cutting programs and spending will help, but people like their programs and will respond negatively at their next election. Plus if we cut that spending, it will stifle job creation and lead to higher unemployment. What to do?
Fortunately for politicians, there is one more option. They can just print more money. Again both streets can have $20,000 in discretionary spending, but this time we don’t have to worry about interest payments on the debt. Of course there is this little thing called inflation which would make the value of those dollars less, but most people don’t understand inflation anyway, and most won’t tie it back to the decision of their Congress(wo)man. It is essentially the silent tax, one that eats away at our savings, our 401ks, and our incomes but rarely gets talked about (except at the gas pump).
There is even another option, championed by conservatives, the government can cut taxes. So going back to our original street, taxes get cut and each person on the street gets $500 more to spend. So now each person has $1500 and the street has added $5000 in discretionary income which gets spent and creates/saves jobs. (Isn’t it strange that liberals think that taking money from rich people and letting the government spend it creates jobs, but letting rich people keep it to spend/invest/save, doesn’t create jobs? I don’t get the logic) This works, no money had to be borrowed or printed and no money was taken from one person and given to another. So why don’t we do this? Well, for one, when taxes get cut, spending usually stays the same or goes up, so you end up having to borrow or print money to fill in your deficit, ie. you have the same problems as re-distribution has. Two, it allows rich people to get richer while keeping poor people poor. This is of course nonsense, but that is the general “fact” in liberalism. In reality rich people probably get richer, but so do the rest of us. It is not always in income (although usually incomes are higher as well), but the standard of living grows for us all. Just look at what today’s “poor” standard of living and compare it to a “rich” person in the 1980s. Today’s poor live better than yesterdays wealthy.
There is one other option. Government can just do nothing. Stop trying to manipulate the economy and create jobs. Let the market work. Give people the freedom to create their own opportunities. Tax them at an appropriate level to fund the NECESSARY roles of government. Which of course is a even bigger debate, one best left to another post.
I’ll end with a few parables (yes I know they are not real, but they still help illustrate the point) about the failures of the politics of envy:
An economics professor at Texas Tech said he had never failed a single
student, but had once failed an entire class.
The class (students) insisted that socialism worked since no one would be poor and
no one would be rich, a great equalizer. The professor then said, “OK, we
will have an experiment in this class on socialism.”
“All grades will be averaged and everyone will receive the same grade so no
one will fail and no one will receive an A.”
After the first test the grades were averaged and everyone got a B. The
students who had studied hard were upset while the students who had studied
very little were happy.
But, as the second test rolled around, the students who had studied little
studied even less and the ones who had studied hard decided that since they
couldn’t make an A, they also studied less. The second Test average was a D.
No one was happy. When the 3rd test rolled around the average grade was an F.
The scores never increased as bickering, blame, name calling, all resulted in hard feelings and no one would study for anyone else.
To their great surprise all failed.
AND
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ”Since you are all such good customers”, he said, “I’m going to reduce the cost of your daily beer by $20″. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share?” They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. ”I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!” ”Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!” ”That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!” ”Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
