Wealth Distribution and Social Stability

Economics is a relatively new profession compared to the physical sciences.  Seeking to explain and predict man’s behavior, economic thought has sought a balance between the forces that propel man to reach his potential and the social dynamics that govern how men live and work together.   There is a balance between individual incentives and the distribution of the fruits of success.

One end of the continuum is focused on growing the economic pie and the other is focused on how to divide the pie.  Modern economic thought struggles between growth and the distribution of wealth and income.  In political terms distribution and redistribution are the same.

Proponents of growth claim that all segments are improved with a growing economy even if not evenly shared.  Distributionists claim that the rich and upper income have received a disproportionate share of the growth in the economy and that government must intervene to save capitalism from itself.

The data on the distribution of wealth and income has been widely distorted.  While we understand that a growing capitalist economy will have winners and losers and that inequality of benefits is a reality, the degree that this occurs is greatly affected by which periods are measured. The starting and ending periods selected for comparison will greatly affect the result; bias can lead to the selection of time frames that supports a preordained conclusion.

The same is true in selecting what is included in income, what economic units are considered, and how these change over time.  Data supporting a widening gap often excludes transfer payments and taxes.  When household income is measured instead of individual income the data can be made to look worse than it is. When remuneration per hours worked is considered the distribution becomes flatter still.  And all of this looks one way when comparing categories, but looks very different when applied to real people.  There is mobility within the system.  Most earners in the lowest quintile are just entering the labor force and will move to higher categories as their career progresses.  Many of the wealthy in the highest categories rarely remain there.  Their status may be affected by the sale of a business that will not be repeated, or short term gains in investments.

J. K. Rowling went from welfare mother to multimillionaire in a short time after she published her first Harry Potter book.  Bernie Madoff went from the highest income bracket to bankrupt and jailed. Madoff’s descent took many other wealthy with him. Madoff may have done more for the redistribution of wealth than any intentional government policy.

Was anybody harmed by Rowling’s ascent? Did her success limit the success of anyone else?  Has the sharp decline in the number of millionaires over the last few years done anything to stimulate this quagmired economy?

Measurements in the distribution of wealth exclude improvements in living standards.  Our poorest have living standards far better than the poor in many other countries.

Still, redistributionists claim that widening variations in wealth and income threaten social stability and thus must be addressed by political means.  Our welfare system thus functions partially as a social bribery fund, keeping the poor satisfied enough in a culture of subsistence to allow the wealthy to enjoy the fruits of their success. In 1885 Joseph Chamberlain fired a volley in a earlier class warfare with his phrase, “I ask what ransom property will pay for the security which it enjoys.”[i]

Economic principles, however, are subject to relative effective value:  what works in one quantity and time may not work in another.    A small increase in the minimum wage during periods of strong growth may have little impact, but this does not mean that a large increase will not have severe adverse effects in a downturn.   The Congress of 2007 raised the minimum wage over 40% in a very short period of time, and today we face record unemployment especially at the lowest end of the income scale.

Likewise,  a system that provides support for a small percent of the population may collapse when that group requiring support becomes too big.  It is one thing to consider the support of five or ten percent of the population that may be unable to support itself; but it is quite another when the portion of the population requiring government assistance approaches 50%.  At that point the unable are blended with the unwilling. We must serious consider whether the very policies to help the poor are in fact creating more poverty.

We are facing a period where the number of people who produce or earn wealth must compete with the number of people who get to simply vote themselves wealth.  Alexis de Tocqueville warned of this outcome shortly after the birth of our nation  when he toured the new country and wrote Democracy in America.

Europe is facing this reality just as we are adopting some of the same policies that pushed them to a financial brink.  Far from justifying more redistribution to maintain social stability, providing unsustainable benefits to such a large portion of our population may be the most destabilizing and destructive political action we could take.