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Predistribution: Anyone got a spare joint?

By Chris Clancy
web posted February 25, 2013

What's clear from Obama's recent State of the Union speech is that nothing is going to change.  Which means we can forget about any kind of coherent economic policy aimed at producing real growth and real jobs.

Obama's only concern seems to be the battle against "inequality".

Some of his loons have even tried to pinpoint this as the actual cause of the non-recovery:

"The U.S. economy is failing to recover and Nobel laureate Joseph Stiglitz thinks he knows the reason. In a recent New York Times piece, Stiglitz faulted growing inequality in both opportunity and economic outcomes. One wonders what facts or statistical evidence bring him to this conclusion[?]" – Burton A Abrams.

Equally, one may also wonder what he was smoking when he wrote his piece. I wish he'd pass some over to me. I could do with a few hours in la-la-land.

Mercifully, there's still a few clear heads out there:

Viz:

The U.S. economic recovery has been anemic. An important reason, perhaps the key reason, is that various recent federal policies—including Obamacare, the Dodd-Frank financial regulations, the rising budget deficits and national debt, the growing list of regulations, and expected higher future taxes—have created a turbulent climate of uncertainty that has hampered private investment.

The keyword here is "uncertainty". Or rather, "regime uncertainty", as formalized by Professor Robert Higgs.

As for "inequality" in developed economies - it's not a curse – it's actually the catalyst which brings about conomic growth and prosperity – provided government gets out of the way.

This was the story of nineteenth century America – a period which Milton Friedman referred to as America's "Golden Age" – a period when there was a perfect combination of free markets, property rights and sound money coupled with what we now call "civil society".

In the 1830s, French aristocrat Alexis de Tocqueville, visited America and was amazed at the progress which the fledgling nation had achieved in such a short period of time. They were actually out-stripping the Europeans in just about every productive enterprise.

One can only wonder, in passing, what Karl Marx would have made of it, had he taken the same tour as de Tocqueville. Maybe a book very different from Das Kapital would have been written. And maybe, just maybe, the horrors which were visited upon so many millions of people, in his name, in the twentieth century, would not have come about.

It's an interesting thought.

However, to continue, what happened in nineteenth century America is an example of what we today call "trickle down economics". The results were spectacular. By 1900, the lot of the masses was raised to a level which was unimaginable barely one hundred years before.

The beginning of the end of this golden age came with the onset of the Progressive Era in the 1890s.

Things would never again work quite like they had. As the government grew so the workings of trickle-down economics became more and more damaged, and along with it, the notion of civil society.

A key year in this process was 1913.

This year saw the introduction of the Federal Reserve System, the income tax and the direct election of U.S. senators. Taken together, these three things sounded the death knell for nearly everything which the Founding Fathers had sought to avoid.

In the twentieth century, socialists re-branded themselves as "liberals". They then set about reducing inequality using, primarily, a progressive income tax syatem. The idea was to cream money off the top and then redistribute in the form of spending and transfer payments to those at the bottom.

Certainly, the booming economy in the immediate post WWII period saw a narrowing of the gap between the rich and the great unwashed. But how much of this was due to progressive taxation is hard to say.

Then came LBJ and his Great Society. The rest is history.

Today, the gap between the haves and the have nots, is actually greater than at any time in the last thirty or more years. The situation has become polarized. We now have a mass of people enslaved on dependency at one end, whilst at the other, a tiny elite who we refer to as "the one percenters".

But the Left remains undeterred. Let's just continue banging away on the same old drum. Tax and spend. Tax and spend.

This article by D W Mackenzie concerns itself with the recent "fiscal cliff" fiasco. He argues that trying to solve our fiscal woes by soaking the rich is "futile". His arguments could equally well be applied to attempts to reduce inequality using the same approach – futile.

The justification for trying to hammer the rich is the word "fairness". We hear it more and more these days – everyone must "pay their fair share". It's a typical populist Obama term – a sort of class warfare battle cry.

It appeals to the masses.

But what is "fair"?

In this article, Charles W Baird sets out a very clear and cogent argument for a proportional rather than a progressive tax system.. It makes a lot of sense. It would be a lot "fairer".

But even if it was implemented right now it wouldn't make any difference - and won't do for the foreseeable future.

What Obama and his loons have delivered to the American people is a "weak" economy. This is something which will not change and can only get worse as long as they remain in power.

The upshot is that revenues raised from income taxes are simply inadequate.

So they have to look somewhere else. Somewhere, I suspect, where they've wanted to go all along. That is, a switch in emphasis from the income tax to a wealth tax.

The driving force here is purely ideological.

Briefly – being rich is made up of two components – income and wealth.

Income is what we earn in return for doing work of some kind. Wealth, on the other hand, refers to our possessions, things we already own – like land, houses, apartments, furniture, equipment, clothing, jewelry, cars, bank accounts, investments and so on.

We can link the two by thinking of income as the return on wealth. Therefore it follows that the wealthier you are, on balance, the higher your income is going to be.

And in the real world this is how the thing plays out.

The problem for the Left is that most of this wealth is concentrated in the hands of a few.

Enter Nobel Prize-winning economist James Meade - closely followed by political philosopher John Rawls - two of American's most influential liberal thinkers.

They argued that the policy of trying to reduce inequality via income redistribution was fundamentally flawed. In their view it was a case of treating the symptoms of inequality rather than its cause. Like closing the barn door after the horse has bolted.

It's not the unequal distribution of income which is the problem, but rather the unequal distribution of wealth.

The way to redistribute wealth, known as "Predistribution", is primarily to impose crippling taxes on private lifetime gifts and transfers and massive taxes on death.

Once again, this is tremendously populist stuff - very easy to sell to the masses – but deeply flawed, in itself, and on more than just a purely practical level.

For example, let's compare two people - Al Gore and Bill Gates. One was born into great wealth while the other went out and made it on his own..

Who is more deserving of his wealth?

"Gates," would come the raucous cry from the mob.

Yes. OK. I wouldn't disagree. But what comes next? Make sure people like Gore start life with next to nothing? Would that be "fair"?

If so then the children of Bill Gates would be treated in similar fashion? Would that be "fair"?

And what would be the effect on incentives – on the whole concept of "risk and reward"?

Then there's the practical element.

Just how would you go about implementing such a policy? How do we put an agreeable value on each individual's wealth? Imagine the disputes – imagine the volume of litigation. And just where, how and by who, would the money raised be spent?

Once we start asking questions they just keep coming and coming.

Until we get to the two big ones.

What would be the knock-on effects on future economic growth and prosperity? And just what would be the impact on the supposed objective of the whole thing – to greatly reduce inequality?

I dread to think - on either score.

Like all socialist utopian nonsense, it sounds great until you really put it under the microscope.

Obama promised to "fundamentally transform" America. If he ever gets his way with Predistribution he will have kept his promise. It wouldn't be a changed country – it would be a completely new country.

But even without predistribution, he's gone a long way down his stated road.

And the result? An economy which is on its knees.

And it's a crying shame. Because it doesn't have to be like this – not given the incredible resources with which the country has been blessed – not least its massive oil and gas deposits. What a terrible waste.

I wish Stiglitz were sitting beside me right now. I'd grab his spliff and take a damn good toke! ESR

Chris Clancy lived in China for seven years. Most of this time was spent as associate professor of financial accounting at Zhongnan University of Economics and Law in Wuhan City, Hubei Province. He now lives in Thailand where he spends his time reading, writing, lecturing and, whenever he gets the chance, doing his level best to spread Austrian economics.

 

 

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