Wealth Distribution

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There's a video going around about wealth distribution. It's mostly weaving its way through Facebook, which at this point is pretty much the rational discourse Seal of Failâ„¢, but I saw it enough that I decided to organize my opinions and run it by my economist-on-call, Jeff. Jeff's co-contributor discussed the video, but didn't quite get at all I wanted to say, so let's get some things written down.

Go ahead and watch the video if you haven't. It basically states some numbers on how income is distributed in the U.S., none of which I've checked up on because they're about in line with what I've heard of before. It mostly dramatizes the size of the numbers, and punches with the perfunctory "wake up" plea, in the same tone as every undergrad who discovers radical ideology the way a preteen discovers his penis.

What is fair, exactly?

Appealing to "fairness" depends on an actual definition of fair, which is the first place this video falls down. The best they offer is a survey on what a sample of people (Democrats and Republicans!) "think" is fair. For a country that so prominently prides itself on not caring what other people think it's kind of a wonder how often we see rhetoric like this. You can make an argument for complete centralized wealth redistribution without having to suggest that one person has any business worrying how much money anyone else has. Marx wrote "to each according to his need," and Joe Capitalist's theoretical inversion would be "to each according to his ability." Neither one quite approaches "to each according to what his neighbors are comfortable with." Moreover, the video kind of undoes itself by explaining what people think the actual distribution of wealth is. If a group is that wrong about where the money is, should they really be in charge of deciding where it should be and how it gets there?

But fairness is always a slippery concept. Let's talk about it more constructively. There's a thought experiment called the veil of ignorance that is supposed to take care of this sort of thing. It relies on an impossible hypothetical, but considering the results it would generate is helpful. Basically it goes like this: if we asked everyone to vote on the rules (capitalism, socialism, minimum wage, etc) after some how deleting from their memory any knowledge of where their position was in society how would they set things up?

Unattainable as that scenario is, it removes the inherent problem of asking these questions as society is in progress (poor people want more money? Rich people want to keep their money? So basically people want money? The deuce you say!). On the one hand you have incentive to help the poor, because, hey, you might be poor, you don't know. On the other hand, decimating GDP in the name of equality hurts your average case, and every rich person you allow to exist under your system is like giving yourself a lottery ticket: you might just be that guy! It basically boils down to our common-sense understading of competition: you agree on the rules, and then you play the game.

There's been a lot of theorys about how it would turn out. Rawles, who was one of the first to employ the experiment, argued that pure socialism would result, mostly due to assumptions on human risk aversion that I and others don't entirely agree with. One thing that is agreed upon, though, is that any state that ultimately results from those rules is fair, and that people will complain after having set the rules, despite them being fair.

Of course it's perfectly admissable that no sane batch of people would ever arrive at the current U.S. system, but if you're going to make anything resembling an argument out of these speculations, you'll need some sophisticated evidence. At any rate, this video doesn't go there at all.

What's all that money doing anyway?

There's an urban legend about The Black Card. This mystical credit card comes with untold purchasing power, upscale perks, and mandatory requirements that owners spend outrageous amounts of money to retain it.

The legend happens to be true.

You can speculate a lot on why The Black Card exists; it's a glamorous display of wealth, it symbolizes membership in a social elite, it's lighter than carrying a million in cash, etc. I'd like to offer you another reason the rich need a high-limit credit card: they don't have any money.

Don't get me wrong, rich people have stocks, and mutual funds, and sorghum futures and oil futures and securities and really just about anything but actual money. And why would they? Relative chump change will buy you an accountant who can easily earn you better returns than a savings account with some good investing. Actual cash is just dead weight. Why keep money around when you can put it to work?

So then, what is this video measuring? Certainly not anyone's checking account, unless there's a lot of one-percenters that are really bad at being rich. It's also not measuring the effects of all that invested money, which produces a whole bunch of activity that makes all of our lives better (until the bubble bursts or someone cooks the books too hard and a bunch of hipsters have to go campin in lower Manhattan).

Is it worth it? Does that activity do anything to offset the trials of the less fortunate? The video doesn't say. Again, there's an admissible argument here, but you have to answer a question the video doesn't ask.

Thinking about the measurement question, video actually begins to look kind of silly. The wealthiest one percent have forty percent of what exactly? You might as well have committed the cardinal data sin and left off the units.

Wealth, or distribution?

A parting thought, based on something Jeff brought up: if that graph looked exactly like it did, but all the people on the left side were eating chateau briand anyway; if we just multiplied all the money on the chart (or, if you prefer, just deflated the value of the dollar) such that the poor were well-fed and well-off and the rich were just doing that much better, would you still care about how the money was distributed?

Economics is discussing the competition over scarce resources, but that's not to say wealth is a zero-sum game. It's possible for us all to do better without the one-percenters doing worse. In fact everything short of absolutely pure socialism inevitably results in a pareto income distribution (new vocabulary word!). I don't think we're dealing with that entirely here; I'm pretty sure as we deal with the problems in our economic system we're going to see that curve wiggle, but income distribution isn't inherently important. Knowing that, we have to make sure we scrub our arguments very hard to make them clean of envy.

There's a lot about our economic system that warrants re-thinking right now. I just hope the myth that a scrap of video on your friend's feed can put you in touch with that conversation dies quickly.

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