Tuesday, April 03, 2007

Redistribution is not the answer

I just submitted this as a letter to the editor at the Herald:


I have complaints with the 4/3/07 article entitled "Upward mobility halted by social inequality." The assumption made is that the presence of someone with more wealth somehow prevents an individual from gaining wealth themselves. This is based primarily on the "fixed pie" fallacy; the myth that there is a limited amount of wealth and that in this zero-sum game if one has more it is at the expense of all others. This is incorrect. Wealth creation is not zero-sum.

Consider this analogy: my neighbor buys a brand new car. Her car is really nice, far better than mine. Does her having a nicer car than mine prevent me from buying a nice car too? Does it make my car any worse than it currently is? Does the existence of someone having a nicer car affect my car at all? This analogy fits perfectly with the rationale in the article: the false idea that someone being better off makes you worse off.

When someone becomes wealthy, take Bill Gates for instance, their wealth is not taken from others, but rather created. Windows has revolutionized the business world, allowing people to become more productive, to have their lives enriched and simplified, and many other bonuses. People benefit by owning it, Gates benefits by selling it, and both parties are marginally better off than before. Wealth is created, not taken at another’s expense, as in the case of taxation. The article complains about how "we pay more to corporate executives then we do to those who work to better our communities." However, are these mutually exclusive? I’d like to think Bill Gates has done more to improve our lives, creating more jobs, more opportunity, and more economic growth than almost anyone alive. How is this not working to better our community?

It is also argued that wealth should be "distributed among every race and class." This does not consider the unintended consequences of wealth redistribution. Free economies consistently outperform those regulated by government: simply compare Hong Kong and Singapore with China over the past 25 years. This is because of the distortion of incentives and deadweight loss taxation and wealth redistribution put on an economy.

What we need to do is not focus on making sure everyone is equal, but making sure that everyone is free to succeed. Equality of opportunity should be the goal, not equality of result.

7 comments:

Anonymous said...

Matthew...

Your comments dissapoint me so. Why is it that you hate poor people? If I had to bet, I would say that you are a rich red, probably having strict ties to southern oil. Am I right Matthew? Did you prosper at our environment's expense?

Anonymous said...

It is interesting that you choose to call attention to Bill gates. After he made his fortune Gates choose to spend HUGE amounts of it, fighting AIDS and poverty in Africa. He recognized that not everyone was lucky enough to be born in a society like ours where he was given an opportunity and worked to change that injustice.

Warren Buffet has joined him, but the vast majority of the wealthy take a different tone, and ignore the poor and down trodden. If more wealthy people voluntarily spent their fortunes helping others then we would all be better off.

Sadly, the majority of the worlds wealthy citezens are nothing like Bill Gates.

Matthew said...

I beg to differ. The greatest thing Gates and Buffett did to help those less fortunate was to get rich in the first place. Businessmen who can put together inputs to create outputs with greater value combined than separate are creating wealth. This wealth leads to jobs, economic growth, and prosperity for all.

It is noble to commend these men for giving their profits to less fortunate, but make no mistake: the greatest good these businessmen do for the poor is to make profits for their shareholders.

No charity ever brought a people out of poverty. Business and economic growth does that.

nathan said...

A couple long notes ...

1. Michael, himself has put forward that "Equality of opportunity should be the goal"

The question is what constitutes equal opportunity? Under the current structure of capitalism in society, it is hard to truly see that equal opportunity. Opportunity is partially one's own effort. However, the status of one's parent's or even great-grandparents is a large part of that opportunity.

Some say, for example, "everyone has the equal opportunity for a high school education" There are number of problems with that statement though. I have experience teaching for a summer program at Andover (one of the nation's top prep schools ... and Bush jr.'s high school alma mater) after graduation. I also volunteered for a week rebuilding some homes in what was at the time the nation's second poorest county, where I slept in their local high school. BIG DIFFERENCE! You have a school one hand where teachers have top of the line facilities (better than many universities), and top teachers - who even have publishing requirements. On the other hand you have a school that can barely afford to fix their windows, let alone get new books and keep their classrooms heated.

Even in comparing only public high schools, they quality of a high school depends upon how much tax money the surrounding local community can put into it. There are large discrepancies in what a high school can offer.

These factors do not include time it takes for some students to work outside jobs for saving for college, while others can comfortably lean on parental support. ...or time and effects of taking care of siblings in single-parent households.

Ideally, in an equal opportunity society, taxes could cover funding through university education and the high school and university one enters would be primarily merit based, but we are not close to a system like that.

I understand, there are difficulties in that with an individuals own merits, one would want to help their children get into life's best possible positions - and to some extent that seems reasonable. But ... see Paris Hilton ... is her position reasonable when looking at so many children in poor communities that face incredible challenges growing up?

I think the matter of what equal opportunity really means would be a quality line of discussion for this blog.

2. Michael states, "the greatest good these businessmen do for the poor is to make profits for their shareholders. No charity ever brought a people out of poverty. Business and economic growth does that."

I happen to believe that the Gates Foundation is at least helping to bring people out of poverty. They focus not only on health issues in Africa, but education. The amount of money put into education in a society tends to reap its rewards (or lack there of) about 20-30 years down the road. I don't think all of Africa's issues will be magically healed in 30 years, but I think Gates' charitable contributions will go a long way in giving opportunities to people who would never have them without Bill and Melinda's help.

It is true that some charities only "feed people fish" rather than "teaching people how to fish" I think a number of countries need both right now and I commend the Gates Foundation for trying to provide both typpes of aid. I do think they can continue to be more creative in developing their organization. They might include some economic aid in the way Muhammad Yunus has developed with microfinance. This truly helps empower the poor in underdeveloped areas to help themselves. Yumun is a great example of a charitable person who helps people get themselves out of poverty - by helping them develop their own business and economic growth.

An example of this a little closer to home is the Greyston Foundation in Yonkers New York. It started as a bakery that employed only the poorest members of the community to make high-end pastries. It grew into a $6 million business with 75 employees which helps provide workforce development, low-income housing, child care, and HIV health care to the surrounding poor in the community. [the model was so successful, it was studied in business schools like Harvard, Princeton, and Stanford]

Charity alone, often temporarily helps, but -as Michael says- rarely brings people out of poverty. Business and economic growth alone, however, don't help people out of poverty. More often than not, they just make the gaps larger. They usually help small portions of a poor population, while making the rest even more poor.

This is found in the majority of countries the IMF and World Bank have tried to develop. Some of the rich get exponentially richer - and the economy of the country as a whole sees growth, but the poor get poorer. They are fraught with more health problems and less means to deal with them.

Those who are willing to work with creative combinations of charity with business and economic growth can help bring people out of poverty. The question is how many people are willing to work at both?

Anonymous said...

hey Nathan...who's Michael?

Matthew said...

I assume by "Michael" you meant "Matthew." I get called crazier things, especially at work.

I find it hard to believe that using bad high schools as a scapegoat for inequality is a reasonable catch-all. Sure, many people do have advantages over others in broken schools, but even our worse schools are generally better than above-average schools 40-50 years ago with regard to the knowledge available. I remember the line from Good Will Hunting, where Will says, "You wasted $150,000 on an education you coulda got for a buck fifty in late charges at the public library." There is still the opportunity for education if the student is willing to do so.

I will admit, however, that this is definitely a cause of one person having an advantage over another. Some advantages are unavoidable. Some people are naturally smarter than others. Some are better looking. The list goes on, etc. Some advantages are manufactured by government, such as a broken school. This is inherent when you rely on government to solve problems. Trusting government further will only serve to distort incentives even more.

The point shouldn't be trying to blend over everyone to smooth and correct any potential edge one person may have over others. That shouldn’t be the role of government or society. Inequality isn’t a bad thing, especially if it is a component of rewards and incentives that is the backbone of a system which leaves all parties better off in the long run. It should not be a goal of society that all peoples be equal or even reasonably equal. The result should be irrelevant. What is relevant is that there aren’t specific, government-mandated barriers to opportunity. Without external pressures creating inefficiencies and market failures, the invisible hand will lead us to prosperity.

The spectacular failures of communism coupled with the sheer logic that the market is the most efficient allocating mechanism for scarce resources should make it obvious that redistribution is not the answer.

Charity has its place, but sometimes the successes of charity are used as an excuse to take money from people and give it to more "noble" causes. This is when the problem arises. Gates' actions are laudable; however his greatest accomplishment was not the distribution of his riches, but his efforts acquiring them.

nathan said...

my apologies Matthew :)