Friday, 18 June 2010

The wealth-redistribution myth

Written by John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/index.php?option=com_content&view=article&id=26549:the-wealth-redistribution-myth&catid=28:opinion&Itemid=64

No sane person with even a touch of compassion can fail to be moved and confused at examples of extremes of wealth inequality. The million-dollar condominium lived in by a family of four that overlooks an area of 1,000 families living in squalor is absurd to most people.

The picture of a man driving a P5-million automobile offering a P5 coin to a street beggar is bizarre. Yet these are images that are countless and are repeated continuously without stop in every nation of the world.

Wealth inequality between members of a particular society is not a condition that emerged with the industrial revolution false thinkers, such as Karl Marx and others would like us to believe. A study released last year by a group of international anthropologists concluded that “The level of economic inequality in hunter-gatherer societies is on a par with the most egalitarian modern democratic economies.” In other words, our high- technology post-industrial revolution societies create nearly as great an equalization of wealth as those ancient tribal societies that “rely on their wits, social connections and [physical] strength to make a living.”

What this research showed was that wealth inequality is the result of individuals and groups of individual being able to pass material possessions such as land, livestock and tools from one generation to another. Further, “Societies where material wealth is most valued are, therefore, the most unequal, said Monique Borgerhoff Mulder, the UC Davis anthropology professor who coordinated the study with economist Samuel Bowles of the Santa Fe Institute” (source: Science Daily).

Regardless of the root causes of wealth inequality, social economists and historians (as well as government leaders) have known through centuries that this inequality can reach a point where the very fiber and structure of a society literally explode in revolution from or financially collapses under the weight of too few “haves” and too many “have-nots.”

Global governments, particularly post-World War II governments, have attempted to manage wealth inequality through a variety of laws and government policies. As wealth transfer to succeeding generations is the most obvious and, perhaps, hated condition that perpetuates wealth inequality, government has imposed high taxes or even outright confiscation to “level the playing field.” Yet this has never been successful except under dictatorships, as there seems to be something inherent in the human condition that says a man or woman has the right to pass their material wealth to their offspring.

Further, while all may be equal in the eyes of the Creator, not all are equal in their ability to create wealth, not only for themselves but for society as a whole. Forbidding a man who builds wealth with the intention of passing the excess he created to his children limits the motivation for wealth creating which ultimately hurts the whole society.

We may say we despise a system that allows for the rich generational family and the oligarchy, in truth, it is probably more envy than contempt.

After 60 years of wealth distribution programs in the West, those societies are really no more “equal” and are less wealthy because of those programs.

The United Nations uses an index, the Gini Coefficient (GC), to measure inequality on a scale of 0 (equal) to 100 (most unequal). The 2009 results will surprise you. Guaranteed.

The top three highly developed countries in terms of wealth inequality are Hong Kong with a GC of 43.4, Singapore (42.5) and the US at 40.8. Less unequal include India (36.8), France (32.7) and Japan (24.9). More unequal are Mexico (48.1), Brazil (55) and South Africa (57.8).

The Philippines comes in on the Gini Coefficient at 44.

Why would a large and rich nation like the US be less equal than Japan, for example, and in the same category as a country like the Philippines? Japan has made little effort at wealth redistribution in a quest for “equality,” while the US has pursued this type of policy for decades.

Many Western nations like the US have ignored, even trying to disprove the absolute wisdom of Lao Tzu’s “teaching a man to fish rather than feeding him for a day.”

In 2009 the US government spent $56 billion on the Food Stamp Program to help feed 40 million people. That $56 billion came from the middle class, reducing their wealth, and was redistributed to the “poor,” but did nothing to increase the wealth of the recipients. Those funds could have created enough direct jobs to sustain 5 million people. And those jobs over a five-year period would have created more jobs, enough to support all the people now receiving free food. Instead, the government will spend $11 billion and not create a single job.

Meanwhile, the “rich” do get “richer,” the middle class pays the bills, the “poor” remain “poor” and the degree of wealth inequality grows daily.

Former British Prime Minister Margaret Thatcher once said that “The trouble with socialism [the ultimate government wealth redistribution policy] is that eventually you run out of other people’s money.” Plus, it does not work.

Yet, the Philippines also must address wealth inequality carefully and with determination, because it is not economically healthy for inequality to grow larger. Aside from the social costs, when too much wealth is held by too few, the economy becomes too dependant on the “rich.” The top 10 percent create 14 times as much economic activity as the bottom 10 percent, about the same as the US. For Malaysia, much wealthier than the Philippines, the number is only 10 times as much, meaning that not only is wealth more widely distributed, but wealth creation comes from a broader and larger part of the economy.

But Malaysia did not succeed economically by wealth redistribution. It succeeded in reducing poverty, increasing economic growth, and reducing inequality by the government almost fanatically supporting the private-business sector.

E-mail comments to mangun@gmail.com. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.

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