Ten Reasons to Ignore “The Gap” and be thankful for America’s rich
I’m not rich. My second family car is a 1995 Mazda Protégé. The first is a 2008 Scion Xb. The latter is only half paid for. I was recently upside down in a home and I had to do some creative borrowing to sell it. I have never set foot on a yacht and my net worth qualifies me to give no wealth management tips in these pages whatsoever -- unless said tips take the form of “what not to do.” Nevertheless, I want to invite people to celebrate superwealth with me.
You see, unlike members of the “tax me more” coalition, I’ve come to learn not only that worries about the “gap” between rich and poor are misguided, but that we all benefit from the existence of wealthy people.
1. Worrying about the gap is not the same as worrying about the poor.
Whenever you read yet another article about the rich-poor gap, join me in asking ‘So what?.’ Some of the smartest (and even richest) people in America conflate concern for the poor with concerns about how much rich people have. It’s rooted in that hoary zero-sum fallacy -- the idea that if a poor guy doesn’t have it, it’s because a wealthy guy does. But here’s how to tell the difference between concern for the poor and indignation about the rich: Whenever someone laments the “gap,” ask him or her if they’d be willing for the superwealthy to be richer if it meant improved conditions for the absolute poorest among us. If the answer is “no” they have admitted their concern is really with what the wealthy have, not what the poor lack. If the answer is “yes,” then the gap is irrelevant. You can then go on to talk about what may be a common goal -- e.g. how best to improve the conditions of the poor without subsidizing them to be wards of the state. In short, the meaningful conversation is about absolutely poverty, not relative poverty.
2. Envy is a paleolithic instinct that should remain in the Stone Age.
Our ancestors lived in small clans of no more than 150 people. Most clans were smaller. It made little sense for people to hoard. Food would rot without refrigeration, for example. Everyone was better off sharing -- engaging what you might call “slow trade.” Otherwise, everyone pitched in where they could. When they did, they were more likely to survive as as group. Millenia in such conditions left us with evolutionary baggage. Wealth disparity not only became culturally taboo, we evolved affective responses to it. But these inborn cooperative strategies -- while successful in Stone Age contexts -- don’t scale very well. Nor do they work in modern economies. Sharing among 50 is not analogous to sharing among 350 million. The dynamics are different and so are the results. None of this is to argue that giving or sharing is wrong -- particularly when it’s within your family or community. It is, rather, to argue that systems of redistribution are built on instincts forged in the fires of our genetic past. History shows they don’t work well. Guilt, envy and indignation -- the Stone Age Trinity -- are cave man ethics that should be tempered.
3. Wealth usually signifies that value has been created.
Unless we’re talking about the beneficiaries of government favor-seeking -- like Henry Paulson or Jeffrey Emmelt -- wealth indicates someone has made a profit and/or invested resources into a profitable venture. Profit signals the creation of value, i.e. that resources are going to their highest and best uses. Super wealthy people, by in large, have created a whole lot of value for a whole lot of people. An absence of super-wealthy people would actually be a bad sign. Indeed, it would signal one of two things: either that not much value had been created (fewer good things in our lives like iPhones and Lindt truffles) or the government had removed a significant incentive from the next generation of value creators.
(Note: since the Summer of Love, women have become more empowered, and thus wealthier. Of course, as successful women marry successful men -- and then have kids -- the demography of wealth changes.)
4. The “tax me more” club has made a false god out of government.
Those who wish the top marginal tax rates were higher are people who simply don’t get how unproductive government is, how venal it is by its very nature and how misaligned its incentives are. Don’t get me wrong, I find it unconscionable that certain wealthy people have become wealthier by colluding with government, say, to reanimate zombie businesses with taxpayer-funded cash infusions. It’s just that, on a whole, having wealth in the hands of honest businesspeople is far better than having wealth in the hands of dishonest politicians. Businesspeople face different incentives. Whenever we get beyond all of the bailouts and subsidies -- real entrepreneurs will have to survive in a profit and loss system that administers stern discipline. The government faces no such discipline. Indeed, its incentives are to punt problems just beyond the next election cycle.
5. Resources in the hands of the wealthy are more likely to find productive ends.
Let’s face it. When resources are sitting in investments or in bank accounts, they are not idle. In other words, most rich people don’t just stuff their millions under mattresses or put their money in giant personal vaults. These resources are constantly working. A portion finds its way to a creative restauranteur in South Carolina in the form of a loan. Another portion is being used by arbitrageurs who help stabilize commodity prices. Another portion is being loaned to a nurse so she can buy her first home. Under normal circumstances, these are all good things. But when too many resources get intercepted by Uncle Sam before they get to the nodes in these economic networks, they will be squandered in the federal bureaucracy -- you know, that vortex where prosperity goes never to return.
6. The constructal law says nature displays ‘few large, many small’ phenomena.
Engineering boffin Adrian Bejan finds vascular systems everywhere. These systems -- trees, river basins, transportation networks and more -- all have similar features: they display the characteristic “few large, many small.” Why? The constructal law says these structures optimize flow. “For a finite-size (flow) system to persist in time (to live),” says Bejan “its configuration must evolve such that it provides easier access to the imposed currents that flow through it.“ Now, if Bejan’s principle stands up across multiple areas, then money flows -- like water on land, CO2 in trees, and O2 in people -- will also display these properties. And that is why we have “few” people with a “large” amount of money and “many” people with a “small” amount of money. This is the way resources are distributed -- like a power law. Constantly interference in this natural distribution requires constant interference in people’s lives.
7. Philanthropy is hard, but more effective than taxes.
For some superwealthy people, saying “tax me more”’ is easy. After all, it’s hard to give and give wisely. It takes work -- particularly to determine whether your social investments are paying off. But when the government takes more in taxes, you can conclude your work here is done. You have bought, very cheaply, a sense of rectitude -- but without all the hassle. Philanthropy advisor Sean Stannard-Stockton refers to “hard-nosed philanthropist” who are “strategic” and “passionate about their causes, who want to ensure their philanthropic dollars have the greatest return – and impact – possible”. These are the givers I want roaming the earth. When do you ever hear about government bureaucrats talking about ROI -- except of course to spindoctor the latest corporate welfare check to GM or Chrysler? Who are better stewards of charitable dollars: the guys who created the wealth to begin with? Or the guys with incentives to get re-elected or reappointed?
8. Want to pay more in taxes? Go ahead!
Guilt is the other side of envy’s coin. So the same paleolithic emotions that make some feel envious or indignant can make wealthy people feel guilty. Why do you think there are so many champagne socialists in Hollywood? But here’s the great thing: Wealthy people who feel guilty about their lot, and don’t want to bear the burdens of philanthropy, can always pay more in taxes. What keeps them from doing so? I’m not sure. My guess is that they think anything they do, others should have to do it, too. But to suggest a universal marginal tax rate somehow limns distributive justice? Well, that just letting one’s Stone Age proclivities get in the way of common sense. If I were rich, I wouldn’t want to reward government incompetence -- from poorly executed wars, to bailouts, to the bloating of the welfare state -- with my dollars. I’d rather invest my money in productive entrepreneurs or give to worthy causes. But no one is stopping wealthy people from donating money to the IRS.
9. Most of us live like kings--even me.
Differences in assets are not the same as differences in living standards. As economist Don Boudreaux writes: “Bill Gates's monetary wealth, for example, is approximately 70,000 times greater than my own, but I'm certain that he doesn't daily ingest 70,000 times more calories than I eat in a day. I'm also certain that the food he eats isn't 70,000 times tastier than the food I eat; that his many homes are not 70,000 times larger than my one home; that his children are not educated 70,000 times better than is my child; that he cannot travel to Europe or to Asia 70,000 times faster or more safely than I can; that he doesn't have 70,000 times more annual leisure than I have; and that he will not live 70,000 times longer than I will live.” Today, even the poorest in America live better than almost anyone in the 18th Century. And while I’d love to have the money to rent more happiness from time to time, no one can measure happiness in dollars.
10. A caveat about crapitalism.
Barron’s editor Gene Epstein cautions us about what he effectionately refers to as “crapitalsm” -- a variant of crony capitalism. While giving thumbs down and birds up to all the CEOs who were successful at lobbying away my tax dollars to bail out their insolvent concerns, I want to celebrate the real value creators in this world. In other words not the crapitalists. If we can ever disentangle the crapitalists from the true entrepreneurs, We the People may be able to prepare our hearts for a true celebration of superwealth. And we may finally be able to leave guilt, envy and indignation in the past.
Max Borders is executive editor at Free To Choose Network. He blogs at Ideas Matter.