The hot idea among American politicians right now is reducing income inequality, i.e., taking money from rich people and giving it to middle class and lower-middle class Americans. A recent book by Thomas Piketty (see this review in the New York Times) adds some academic credibility to the idea that drastic changes in taxation would make almost everyone better off:
“The only way to halt this process, he argues, is to impose a global progressive tax on wealth – global in order to prevent (among other things) the transfer of assets to countries without such levies. A global tax, in this scheme, would restrict the concentration of wealth and limit the income flowing to capital.”
I’m wondering if there isn’t already a good body of data on what happens when middle class people get a big infusion of wealth from rich people. This kind of transfer of wealth happened in the U.S. in the mid-2000s. A huge amount of wealth was transferred from (mostly rich) investors in mortgage-backed securities to (mostly middle class) homeowners who siphoned equity out of their houses every time the value went up. A a lot of middle class Americans ended up not only living rent-free for 3-7 years but also some drew additional spending cash out of these houses. We should be able to find thousands of people whose housing costs went from +$2000/month to -$2000/month. That’s a $48,000/year after-tax supplement to income and presumably more than the average family could expect to receive if the wealthiest Americans were subject to a 90% wealth tax.
Tracking these folks down shouldn’t be very hard as many of the transfer recipients were clustered in California. Wouldn’t that be the natural place to start a research project on whether or not a wealth tax and transfer program would yield long-term benefits? Are the families receiving the $48,000 per year transfer now better off than a control group of families who incurred substantial housing costs over the same period, e.g., those who paid rent throughout the boom years rather than participating in the bonanza?
I’ve always felt that if you took all the money available, redistribute it equally among all, and came back twenty years later, the people that were poor to start would still be poor and the people that were rich would still be rich.
The left believes that success is mostly a matter of luck. In reality, it’s a combination of hard work, good habits and genetics. There is little the Government can do to change this.
The sad thing is that the fools are on the verge of throwing away a system were even low-income people are well off. A poor person in the US may not have as much money as a rich person, but has access to stuff that others only dream of. When I go through poor neighborhoods, I see satellite antennas on every apartment, teens with cell phones and expensive running shoes and other such things. Even a trip to the local grocery store gives access to inexpensive food that people in other countries envy. This whole income inequality thing is nothing more then evil politicians manipulating people for their own gain.
“A huge amount of wealth was transferred from (mostly rich) investors in mortgage-backed securities to (mostly middle class) homeowners who siphoned equity out of their houses every time the value went up.”
There’s no transfer of wealth here. The “middle-class” were converting their own equity into cash. The “mostly rich” were converting their cash, obtained as low interest loans from the govt., into real-estate equity and an income stream (interest paid by the middle class to the rich).
It can be argued that the “cash” was then spent by the middle-class paying for necessities and “rent”/mortgages i.e. wealthy disappearing from their lives. The rich on the other-hand had made a huge land grab and owned more real-estate than ever before. The rich have more long term wealth than the middle class. If there was a wealth transfer it went the other way than what you claim.
Phil,
From my experience, most of the middle-classers who had extraordinary investment gains due to their home or other real estate appreciation during the 2003-2007 years
are in worse shape financially today than if they had not benefitted from any gains whatsoever.
Simply put: winners win and losers lose, and no amount of wealth redistribution by our government will assist the losers. And yes, I know that’s an awful opinion.
I see legions of these people who burned through their new wealth by investing in what I call depreciating asset classes: boats, cars, jewelry, furniture, vacations.
This will be trite, but it seems like most middle-income types simply don’t have the discipline and financial IQ (and make very little effort to gain such) needed to really gain on their envyed/despised wealthy brethren.
They would like to “be wealthy” but are usually too caught up in a battle of Facebook vanity i.e. spending too much time on the decidedly wrong subjects. I think an interesting study would be why some folks will never win financially while others could lose everything and (without whining for the US to provide wealth redistribution) be back on top financially in a relatively short amount of time.
Andrew Nicholson,
Many middle-incomers in my locale experienced large equity gains on their real estate and did not spend the windfall on necessities. They spent it on personal property that was worthless in a few years.
You seem to take for granted that redistribution is mostly about making recipients’ lives more enjoyable. I find it far from obvious.
One reason to give money to middle classes is to keep a market alive. Most rich people become rich by selling goods and services of debatable interest, and they need people with enough disposable money to buy that. This is well-known as Fordism, but individual companies can only raise their employees’ standard of living (and would rather not), not their customers’, who are mostly other companies’ employees. To resolve the stalemate, you need state-level regulations forcing everyone to participate in the redistributive effort. The same problem as with any other publicly-funded utility, actually.
Another reason it to make top classes poorer. As you observe in your next post, beyond a few millions, money buys you little marginal happiness, and can even have a negative return. Big money is not purchasing power, it’s power. Control over companies and economy, ability to buy laws and lawmakers. If that money power is used to accumulate more money+power (and that’s what it’ usually used for, few billionaires decide to buy themselves a worldwide cure for malaria), you end up with a wealth black hole, which will yield destructive power and accaparate the wealth produced by others, thus disincentivizing them. Wealth redistribution is comparable to the (currently broken) antitrust laws.
Finally, when you combine natural wealth accumulation with inheritance, you create a parasitic class of rentiers, who live off the product of their ancestors’ accumulated wealth. In much of Europe, laws which force you to split inheritances almost equally among your offsprings were in part intended to get rid of rentiers (Picketty happens to be a specialist of this aspect of fiscal history). You want it to take about a lifetime of work to get enough to live as a rentier (and then you call them retired).
https://decorrespondent.nl/541/why-we-should-give-free-money-to-everyone/31639050894-e44e2c00