A bunch of well-connected rich people and government officials are descending upon Switzerland for the annual World Economic Forum meeting in Davos.
This upsets many people, and perhaps with some justification. After all, bad things often happen when big business and big government intersect.
But some folks reflexively think that wealth is bad and they would like us to believe that the economy is a fixed pie, meaning that the rich have more money because the poor have less money.
If you think I’m exaggerating, check out a new report from Oxfam, a UK-based group that was created to alleviate poverty but has largely morphed into a left-wing pressure group.
The folks at Oxfam complain about the supposed “capture of opportunities by the rich at the expense of the poor and middle classes” and that “tax rates for the richest have fallen in 29 of the 30 countries.”
Here are some excerpts from a report in the EU Observer.
As the world’s richest and most powerful men and women prepare to meet in the Swiss resort of Davos for the annual World Economic Forum on Wednesday (22 January), the British development charity, Oxfam, has issued a new report on global inequality. According to its findings, the wealth of the world’s 85 richest people – €81.2 trillion – amounts to that of the poorest half of the world population, or 3.5 billion people. …”In Europe, austerity has been imposed on the poor and middle classes under huge pressure from financial markets whose wealthy investors have benefited from state bailouts of financial institutions,” the charity said. Financial deregulation in the US has contributed to the situation, in which the richest one percent of the population has more money than ever since 1933. …The charity said Davos participants should reverse the trend and pledge to support higher taxes for the rich, while refraining from using their wealth to seek political favours.
There are several parts of this excerpt that deserve attention, including passages that are correct (such as bailouts giving undeserved money to the rich) and passages that are nonsensical (the financial crisis was caused by intervention, not deregulation).
But I want to focus solely on the inequality issue. Let’s assume Oxfam is right and that the world’s 85 richest people have $81.2 trillion of wealth. The group obviously wants us to think this accumulation of wealth is bad and that it somehow comes at the expense of the rest of us.
Tim Carney of the Washington Examiner hits the nail on the head, explaining that there’s a big difference between honest wealth and riches obtained through government coercion.
…is it a bad thing for a country to have some really rich people? Again, it depends on how they got rich. Sutirtha Bagchi of the University of Michigan’s business school and Jan Svejnar of Columbia’s School of International and Public Affairs studied how inequality correlates with economic growth. In general, more inequality meant slower growth, and less inequality meant faster growth. But in many countries, over various time periods, growing inequality had no effect on economic growth. The new study suggests that an increase in inequality hurt the economy when the rich were getting rich through political connections. That is, inequality hurts the economy when “a large share of the national wealth is held by a small number of politically connected families,” as the authors put it. …Bagchi and Svenjar took pains to classify political billionaires as narrowly as possible. …The political billionaires were only people who “would not have become a billionaire in the absence of political connections that resulted in favoritism and/or explicit government support.”
The oft-missed lesson here is that undeserving wealth generally is obtained because of big government.
Which reminds me of a very astute observation by a former Cato colleague, who wrote that, “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.”
Carney continues, pointing out that wealth obtained through markets is good. Such success creates a bigger pie and helps boost living standards for everyone.
But wealth achieved via government is cronyism, and that contributes to economic stagnation.
When a country’s wealthiest got wealthy through market means, the resulting inequality has no negative effect on economic growth. This jibes with what we know about free markets. If people can get rich by providing valuable things at good prices, then society will get more valuable things at good prices—and people across the income spectrum benefit. But if people get rich by pocketing subsidies and using the state to crush competitors, then they gained their wealth at the expense of everyone else. Bill Gates became a billionaire by making and selling something that makes regular people more productive and more connected. Buffett got rich largely by providing capital to underfunded but well-run businesses. If Bagchi’s and Svejnar’s findings are correct, then the bottom line is this: Inequality itself doesn’t hurt the economy. Cronyism hurts the economy.
I fully agree with Tim’s analysis, though I would have drawn a distinction between the younger Warren Buffett, who was a savvy investor and the older Buffett, who has climbed into bed with the political elite.
The bottom line is that the poor aren’t poor because of honest rich people. The poor are suffering because of big government, including the cronyism that lines the pockets of dishonest companies and individuals that feed at the public trough.
Unfortunately, many insider leftists are perfectly content with those policies and they use inequality to distract voters from the real problem.
There are honest leftists, of course, and they presumably would be outraged by the sleaze in national capitals. Their problem is that they genuinely think the economic is fixed pie. Or they think that inequality is such a bad thing that they would be willing to reduce incomes for the poor if it meant the rich suffered even more.
If you don’t believe me, watch this marvelous video of Margaret Thatcher debunking the left.
And my old grad school colleague Steve Horwitz also has some very sage observations on income inequality and class warfare.
P.S. In its report on inequality, Oxfam also went after tax havens and said more revenue for government would help reduce poverty.
Oxfam also estimated that €15.5 trillion of the wealth is hidden from the taxman in offshore accounts, at a time when governments are cutting public spending. …tax avoidance by EU and US corporations in Africa is depriving its governments from resources which could be use to fight poverty.
I wrote a study years ago exposing Oxfam’s sloppy methodology on tax competition issues. No wonder they’ve been labeled as being part of the “tax taliban.”
But what really irks me about that passage is the assumption that bigger government reduces poverty. That’s nonsense. The data shows that growth is the best way of helping the poor.
P.S. I wrote yesterday about Chris Christie’s problems in New Jersey. I said his real challenge was the need to reduce the burden of government, not the bridge scandal.
But I’m a sucker for good political humor, so enjoy this image that appeared in my inbox.
P.P.S. Since Oxfam criticized tax havens, I can’t resist calling your attention to my video tutorial on tax competition and tax havens.
Simply stated, we need some external check on the greed of the political class.
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Everette Hatcher III, this is all to obvious.
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Obama picking winners and losers turns out to be Obama picking losers only it seems!!
in march… president Obama and pope Francis will meet… one of the main issues to be discussed will be formulating a method of global redistribution of wealth to benefit the world’s poor… disinformation… moral imparities… and global destabilization will combine with irresponsible media coverage to push the president’s agenda…
we had better be ready in November…
I agree with the sentiment, except the metaphor is broken. Jordan makes money for lots of folks around him just like Gates. Team Owner, networks, shoe makers, agents, etc., etc. The salient point is that neither Gates nor Jordan makes anyone worse off…either those consuming their products or sharing in the profits are better off…as well as the government.
[…] via The Biggest Impediment for the Poor Is Government, not Inequality | International Liberty. […]
Michael Jordan provides spectacle, which is a reason (a product) that motivates others (perhaps even Bill Gates) to invent, produce and distribute other stuff that other people want.
In a world without Michael Jordans there is one less reason to work and be compensated by making things that other people want.
Thus Michael Jordan is not collateral junk of the capitalist system whereby we must accept the (Michael Jordan) junk in order to enjoy the (Bill Gates) benefit. Michael Jordan is an elevator of standard of living. Perhaps not as much an elevator as Bill Gates, hence he does not quite have Gates’ wealth — and probably Gates would out-wealth Jordan even in a freer economic system.
People give Jordan a pass because they better understand his so-rare exceptionalism. The jumps, body contortions, coordination, precision and game skill of Jordan is something tangible and familiar to most people who have experimented with their own physical capabilities and limits, and thus Jordan’s exceptionalism is more immediately evident. Not so much with Gates whose products are less comprehensible black boxes to the voter-lemmings. Even less so with great minds in the financial sector where most voter-lemmings could not describe what these people do and what their value added to the economy and prosperity is. Of course, there is also cronyism, favoritism, regulatory capture and other forms of corruption. But those can mostly be traced back to past voter-lemming attempts to take collective majoritarian control of the economy and also conveniently redistribute from the rich whose function they did not understand. Ie. free markets and enterprise vs dirigisme.
Smapple:
While I agree that Michael Jordan brings only emotional rewards to his fans, for watching him and buying his products; whereas Bill Gates brought financial rewards and significant economic growth to all; in a free market the customer rules. One cannot view the situation from the outside to imply that somehow the market made a mistake.
People do give Michael and other celebrities a pass because of emotional attachment, verses Bill Gates, who in his role as capitalist does not. This is certainly not “fair” for anyone other than a liberal.
“Simply stated, we need some external check on the greed of the political class.”
In essence,
We need as early feedback as possible to the fact that are digging our own graves as voter-lemmings trying to redistribute unearned wealth through the majoritarian process.
But instead, we choose to disable the stalling competitiveness alarm and seal that annoying safety valve.
The best you can hope for is an orderly decline. Slow enough to forget and let go of your once top status. But with the safety valves under persecution, it may be quite worse.
——————
Eighty one trillion euros is more than one hundred trillion dollars. Total world GDP does not quite add up to that yet — and the more voter-lemmings listen to Oxfam, the longer it will take to get there.
Those who complain about the ultra-wealthy don’t understand the difference between wealth and consumables.
If we assumed that all wealth was redistributed evenly, it is true that some would receive partial ownership of nice homes or cars. However, the bulk of the redistributed wealth would be unusable.
For example: Three people might be given equal ownership of a lathe somewhere in Tennessee. They could not sell that ownership, because no one would have the money or incentive to buy them out. If they figured out how to get to and make a product with the lathe, government would redistribute whatever they made.
Even those receiving cash would find that owners of consumables would rather keep what they have. The only trade would be black market barter, where people trade to improve their status, without revealing the improvement to government.
Mild redistribution impedes future growth in favor of current consumption. Aggressive redistribution will collapse an economy. [e.g. France]
There’s an ENORMOUS calculation error in the EU Observer report as well, which doesn’t appear to be in either the Oxfam report or the Credit Suisse paper that they cited re: the top 85 individuals. For them to have a combined net worth of $81.2 trillion would mean that their average net worth was close to $1 trillion each.
Given that Buffett, Slim, and others in the top 10 have net worths in the $50-100B range, someone did their math wrong.
Dan- I become a bigger fan with each blog. Firstly, I cannot believe they used the term “Financial deregulation in the US”. Wow that’s rich.
So, let’s make a comparison. Michael Jordan versus Bill Gates. Both are rich. When Bill got rich, thousands more got rich around him- employees, investors, partners, etc. When Michael got rich who else got rich? Armed guards? His employer? Bling salesmen? Car salesmen?
And let’s step it up a bit. The left seems to have no problem with entertainers who got rich- only with those who are rich from hard work. That’s because they fail to separate the entertainer who is Michael Jordan from the CEO who is Michael Jordan. I also have no problem with Michael Jordan receiving money for playing a good game of B-ball. However, as soon as he left the court, he was not playing ball, and received money just for being Michael Jordan. So, he became the enterprise called Michael Jordan. Additionally, the B-ball player he was no longer exists, and yet the money continues to roll in. So, now you have the CEO Michael- yet he employs nobody other than a publicist, and just socks money away. Why does the left NOT have a problem with the CEO Michael Jordan while they continue to lambast the CEO Bill Gates?
Please help me understand their logic. The guy who employs thousands is a monster, but the guy who just lays around and brings NO value to society is a hero?