MATH VS. MALARKEY: The Canard of Income Inequality

obama- redistribution

by Bruce Tanis

Redistribution of wealth has been a failed policy of socialists since the ink dried on the final, smudged page of Karl Marx’s Das Kapital, and it wasn’t long before corrupt, manipulative politicians figured out that if they could cry income inequality to the great and unfortunate unwashed and promise redistribution, they could get their greedy hands on some or all of the money of a society’s producers without having to be innovative or productive themselves. An added benefit would be that they could use the money stolen to buy the votes of the peasants, securing power while creating dependency over time.

Politicians soon figured out that they could persuade the poor and less educated that financial success was a cruel, zero sum game–that if one person wins, the other loses, which makes it all somehow dirty, corrupt, unfair and dishonest. Those same politicians would go on to set themselves up as champions of the poor, while their policies continued to keep the poor in poverty and expand the poverty level.

It just isn’t so. Free Market Capitalism has lifted more than one billion people out of poverty in the last 100 years…and will lift many more up if left alone to flourish. Still, proponents of redistribution of wealth put forth the lie that those who become successful through developing ingenious ideas and then taking great risks with their own or borrowed capital, hiring workers, whom they paid in the process, were somehow stealing from their workers.

Well, we all know how that story ended in Russia and China and every other place where Marx’s ideas were implemented by such politicians. 150,000,000 people were slaughtered by socialist tyrants and their followers and whoever was left alive was cast into slavery and abject poverty by the state. This murderous march continues, even today, in Venezuela, N. Korea, Myanmar, Cuba, Africa, and China. People disappear every day, killed for their political dissent. This is the cruel, hard, cold, brutal fact of socialism; the ginning up of class warfare and revolution based on income inequality for political gain and power.

albert-einsteinSomeone once said that the act of doing the same thing over and over again and expecting different results is the definition of insanity. Yet, now, Democrats plan to demagogue income inequality and the wealth gap for political gain in this year’s elections, repeating the recipe that Lenin and the Bolsheviks cooked up in Russia in 1917. Most of what was said then and what is said now about income inequality is pure malarkey; it is economically and mathematically ignorant of facts or, at best, ill-informed, but some cannot resist continuing to perpetuate the myth among the naive and vulnerable to gain power and control. Much to their disgrace, economists focusing on measures of income inequality bring little light to the issue. Many of them conduct studies bought and paid for by big grants funneled to academics by the very politicians who stand to benefit most from such myopic and tainted results.

Let’s take a look at the fallacies and fundamental dishonesty and conflict of interest of their arguments.

Income is a result of an activity, a transaction between two or more willing participants. As such, results alone cannot establish whether there is fairness or justice. You have to look at the process of attaining income and wealth. As Junior Walker once said, “What Does It Take?”

In order to make the point, I offer a simple example. Suppose three buddies, Hughie, Dewey and Louie decide to play a weekly game of poker. Hughie wins 75 percent of the time. Dewey and Louie, respectively, win 15 percent and 10 percent of the time. If we only know the game’s results, we can conclude absolutely nothing about the fairness or justice of the poker game. Hughie’s huge winnings are consistent with his being either a very skilled and astute poker player or a really dirty cheater, but we can’t tell from the pure data of results.

For us to know if there has been justice and fairness in this game, the game’s process must be examined. Appropriate questions that might be asked are:

  • Were the rules obeyed?
  • Were the cards unmarked?
  • Were the cards dealt from the top or bottom of the deck?
  • Did the players play out of their own free will or were they forced to play and get fleeced?

If these questions all yield “yes” answers, then poker fairness and justice, was present in the game, regardless of results, even with Hughie’s winning 75 percent of the time.

Similarly, income is a result of some activity and contract between people. In a free society, for the most part, income is a result of one’s capacity to offer something that serves his fellow man and the value his fellow man places on that service. If I shovel or plow your driveway and you pay me with a $50 bill. That $50 bill is a certificate of performance. Why? It serves as evidence that I served my fellow man and enables me to make a claim of value on what others, like farmers, produce when I visit the grocer.

Steve JobsWildly successful Apple founders Steve Wozniak and the late Steve Jobs became billionaires by creating the personal computer and by creating ingenious products and services that enhance its use. Just as in the case of me serving my fellow man by shoveling his driveway clear of snow, they provided a service and product to their fellow man. The difference is they were more creative, took more risks, and served many more of their fellow men and did so far more effectively and creatively than I did, so they received many more “certificates of performance,” in the form of green pictures of dead presidents, which enables them to make greater claims on what their fellow man produces, such as big houses, cars and even private jets. All I did was borrow my dad’s snow shovel, and my reward was commensurate with my risk and ingenuity.

Woz and Jobs and people like them created wealth by producing goods and services that improve the lives of millions upon millions of people all over the world. Should those who have improved our lives be ridiculed and scorned or punished because they have higher income or wealth than most of us? Should Congress or any government entity confiscate part or all of their wealth in the name of fairness and income redistribution?

Except in the instances when government interferes and rigs the game with crony capitalism or when it creates monopolies (as it is doing now with healthcare), or when it picks winners and losers (as it is doing in the energy industry) income is mostly a result of one’s productivity, risk and ingenuity and the value that people place on that. Far more important than income inequality is productivity and risk and intelligence and skill inequality. That suggests that if there’s anything to be done about income inequality, we should focus on how to give people greater capacity to serve their fellow man, namely raise their productivity, teach them how to take risks, and educate them and train them better.

To accomplish that, let’s have a quick look at some things we shouldn’t do. Becoming a taxicab owner-operator lies within the grasp and skill set of many less educated people, but in New York City, where I live, one must be able to buy a medallion license, which now costs $700,000. Why? Government creates barriers to take in more money. The result: reduced commerce and opportunity, along with higher taxi fares and less riders willing to pay the higher fares. The excess money goes not to cabbie profits and self-sufficiency for them and their families, but straight to the politicians via the taxi and limo commission. Now, most cabbies lease their cabs at high rates from rich cartels of medallion owners, making much less for themselves and their families. There are now thousands of examples of government restrictions that reduce opportunity. What about the incompetent and fraudulent education received by so many minority youngsters in our inner cities? And then we hobble and restrict their opportunities to rise from poverty further with laws that mandate that businesses pay them wages that far exceed their experience and productivity, which denies them on-the-job training and incentivizes their employers to find ways to automate their jobs and fire them. Two fine examples are fast food workers and bank tellers. Hamburgers can now be flipped by robots and ATMs have taken the place of tellers. Why? Minimum wage levels and benefit requirements caused innovations to be more attractive.

Now let’s get back to the poker game example. If one is really concerned about the “unequal” results of the games, which is more fair, taking some or all of Hughie’s winnings and redistributing them between Dewey and Louie, or teaching Dewey and Louie how to play better? If left to many politicians, they’d prefer redistribution. That way, they could get their fat, greedy hands on some of Hughie’s winnings. That’s far more rewarding and easier to them than raising Dewey’s and Louie’s productivity and education level.

As for the wealth gap? It’s not unfair. It’s simple math. It’s called compound interest. If you make one million dollars and I make ten thousand dollars, and we both invest that money at 10%, both our portfolios will double every 7.2 years. That’s the mathematical rule of 72. But at the end of 7.2 years, you will have two million dollars and I will have twenty thousand. At the end of 14.4 years, you will have four million dollars and I will have a measly forty thousand. That’s not unfair, that’s how compound interest works. It’s math.

Stop allowing crooked politicians to try and convince us that simple math is somehow unfair and force them to focus on the real problems: the lack of education, training, self-determination, and motivation; all virtues of a healthy society. Redistribution is not only theft, which corrupts politicians absolutely through conflicts of interest too lucrative to avoid, but it encourages the wholesale avoidance and extinction all these virtues, replacing them instead with vices like sloth, greed, dishonesty, and selfishness, which is why it must be discouraged at any cost.

Bruce Tanis thumbnail imageAbout the Author:
Bruce Tanis is an economist, financial expert, world traveler, and George F. Baker Scholar who works in finance in Manhattan.