The New York Times ran a story on Oxfam’s “warning about deepening global inequality”. It seems that 80 rich bastards have $1.9 trillion, “nearly the same amount shared by the 3.5 billion people who occupy the bottom half of the world’s income scale.”
Could this be right? The most valuable capital on the planet is human capital–the ability of people to produce stuff. The gross world product (GWP) is currently at about $75 trillion in nominal dollars (assuming that is also the unit for the $1.9 trillion). So if these 80 rich people wanted to be generous they could fund a 10-day vacation for everyone on the planet who is currently working. Ergo they are certainly rich but aren’t 3.5 billion people way richer if you factor in their ability to produce stuff?
1. The study measured net worth, not annual income.
2. Human capital has not been adopted as a GAAP practice. Some tech companies are toying with the idea, but it’s still rare.
3. That’s a strange definition of “rich” you’re using–it sounds vaguely like a labor theory of value. Assuming that those 3.5 billion take home 100% of the value of the GWP they help produce is a dubious proposition.
It’s very deceptive because they are talking about wealth (measured as net worth – assets minus liabilities) rather than income. For example, while US blacks earn about 2/3 of white income per capita, average black wealth is only around 9% of whites ($6,446 per HOUSEHOLD). So one billionaire balances out 155,000 average American black households , and two would more than balance out the entire black population of Philadelphia (and American blacks are not all poor and even the poor are rich by world standards). And that’s just a measly billionaire – the guys in the top 80 average $24 billion each.
http://www.pewsocialtrends.org/2013/08/22/race-demographics/
What accounts for this? For various reasons (mostly, but not entirely because they don’t make enough to begin with) poor people tend to spend every cent that they earn (and then some) so they never accumulate any wealth.
Probably the poorest billion out of that 3.5 billion own only the clothes on their back, so a billion times nothing is still nothing. Note that some of those billion actually produce stuff and are paid for their production, but they consume at least as much stuff as they produce so their leftover accumulated wealth is zero.
In fact, a good fraction of your commenters are individually richer than the poorest 2 billion taken together:
http://blogs.reuters.com/felix-salmon/2014/04/04/stop-adding-up-the-wealth-of-the-poor/
Salmon makes a lot of good points. Let’s say you confiscated the entire accumulated wealth of those 80 nasty bastards and redistributed it to the poorest 3.5 billion. All the wealth that they and their families had accumulated over a lifetime of hard work and innovation. Each poor person would get a one time check for $543. Probably they would spend it all immediately and if you checked back in a year, their net worth would remain unchanged. The next year you could confiscate all the wealth of the next 80 richest shmucks and so on (each year the billionaires would be lower down on the list so the checks would get smaller), but it would never really budge the needle on the wealth of the poorest 3.5 billion. But you can be sure at some point billionaires would realize that there is no point in working hard to become a billionaire and managing the thousands of employees needed to run billionaire type businesses if someone is going to take it all away from you anyway.
Izzie presents a strawman extravaganza.
“Let’s say you confiscated the entire accumulated wealth . . .”
I’m not aware of any significant political movement in America advocating a 100% wealth tax.
“All the wealthy that they and their families had accumulated over a lifetime of hard work and innovation.”
Or being born with the last name “Walton.”
“billionaires would realize that there is no point in working hard to become a billionaire.”
Do people really need incentives to become billionaires? Did Steve Jobs, Bill Gates, and Mark Zuckerberg create what they did to become billionaires? Considering how much money they gave away, I’ve a feeling they were satisfied living on a mere $500 million.
The part that you should focus on is the other end. My point is that no matter how much wealth you confiscate from the rich (whether it is 50% or 100%), once you spread that wealth thinly over the billions of poor, it does nothing to increase their (nonexistent) long term wealth. The only thing that can make people wealthy in the long run is to increase their income to the point that they no longer need or desire to consume 100+% of that income. Every place that has tried to increase equality by confiscating the wealth of the rich has ended up making everyone poorer (see Cuba). You can have equality though – everyone is equally poor. China tried it one way and then the other and when they gave up on keeping everyone equal, everyone, including the poor, increased their incomes significantly (some more than others).
I think that the comments above demonstrate that the real debate in the U.S. is over the extent to which people follow economic incentives. People who advocate for higher taxes assert and presumably believe that Americans won’t change their behavior in response to those taxes. This belief is supported to some extent by the observed fact that a lot of people in Sweden and Britain apparently kept working even when tax rates were super high (they’ve since been scaled back). Academic papers showing that people do adjust their behavior in response to cash incentives are not persuasive for these folks. On the other side you have the mainstream economists, e.g., Harvard’s Mankiw in http://www.nytimes.com/2010/10/10/business/economy/10view.html (“I Can Afford Higher Taxes. But They’ll Make Me Work Less.”)
The two sides don’t seem to be in any greater danger of convincing each other than are the two sides of the “What should we do about CO2 emissions” debate.
Izzie- more strawmen about “confiscating wealth” a la Cuba. Progressive income taxation (which I suppose is a form of “confiscating” money) has been implemented in the majority of the top largest economies in the world.
Philg– respectfully, I don’t think that’s “the real debate.” I don’t know any major economist or even political group that thinks that economic incentives don’t matter at all. Otherwise we wouldn’t have expenditures like the Earned Income Tax Credit.
The real debates are how much they matter at different income brackets, and are there countervailing reasons (i.e., paying down the national debt) to eliminate tax expenditures anyway?
Easy: Look at the 505 scornful comments to http://www.nytimes.com/2015/01/22/opinion/obamas-bad-economic-ideas.html ; a lot of them boil down to “rich people are different and will sit still to pay higher taxes”.
I think you see this all over. The Feds made PTSD a disability for veterans, thus resulting in a tax-free pension instead of a taxable one. There was then an explosion of PTSD claims. Some media coverage treated this as an economic incentive story. Other journalists wrote about how there was a sudden epidemic of PTSD and didn’t mention the financial incentives.
We interviewed an Illinois policymaker who told us that a parent would not seek to win a 60/40 schedule with children rather than a 40/60 schedule merely to be $2 million wealthier when the children reached adulthood (we postulated two doctors, each of whom earned $200k/year after tax and with two joint children). She said, I think sincerely, that no parent would be motivated merely by the desire to either receive or avoid paying $1 million in tax-free child support. What she said was at odds with what most divorce litigators told us, but there is no way to look into the hearts of custody plaintiffs and establish the truth.
You also see this with public housing. Advocates say that a free $5000/month apartment (as you can get in Cambridge, MA) will not demotivate people from seeking employment.
I think there’s more to it than that. What the “confiscate the rich” people miss is that having rich people around and not taking away their incentive to make even more money is a positive social good not just for the rich people but for the poor, and not just in the “trickle down” sense that the rich guy will hire you to cut his lawn (though that creates jobs too). In order to be a rich guy, you usually have to create (or keep going) an organization that employs thousands and thousands of people who would otherwise be getting paid a lot less digging in a potato field/rice paddy. Envy is a natural human emotion but it’s not a good basis for an economic system.
If you look at the history of corporations, they were originally specially chartered organizations that required an act of the legislature for each one. In order to be granted limited liability, you had to prove that you were going to do something socially useful – build a railroad or a canal, etc. Then we gave up completely on that and extended corporate privileges to anyone who wanted to make money for any reason, whether it was socially useful or not, but there were still societal constraints on what you could do. Now those are gone and you have organizations that don’t do ANYTHING socially useful – hedge funds that do high speed trading – what social good whatsoever is there in that?
This permeates even manufacturing companies that otherwise make socially useful things. Someone recently gave me a “Tassimo” single cup coffee machine, which appears to be a useful object – it has a boiler to heat hot water and a pump to pump it out. Very good and socially useful so far. BUT, it also has a bar code reader, which is a strange addition to a coffee pot. Does the bar code reader help me? NO – it exists in order to cripple the machine. Unless I buy (very expensive and environmentally wasteful) coffee capsules made by the people who produced the machine which have the correct bar code on them, the machine will not run. Maybe I am wrong, but think there was a time in American history where these sort of plays based on pure greed would not have been successful in the market – you would have been shunned for even trying to sell a Ford car that would only run on Ford brand gasoline. Any bean counter who proposed such a diabolical scheme would have been told that this was unethical. But nowadays, you see such shameless schemes everywhere (almost all new printers have such schemes too). The 2nd generation Keurig machines have also just added such a “feature”. And people put up with it.
Izzie, Easy,
There are economic and social benefits associated with concentrated income/wealth and economic and social problems associated with more equitable distribution of income/wealth. There are also economic and social problems associated with concentrated income/wealth and economic and social benefits associated with more equitable distribution of income/wealth. While our existing political discourse encourages people to focus on one set of benefits/problems, what is really required is to find the appropriate balance between all of them.