Desperate to leave a legacy—of having turned the United States more sharply toward socialism—President Obama is grasping for various schemes. In his latest State of The Union address, he again brought up solving the “problem” of income and wealth inequality by the means of state intervention as part of his desired legacy. He envisions taxing the rich more and providing government-subsidized child care and education to all, among other things.
President Obama’s and other Leftists’ obsession with inequality is fueled by studies such as the recent one by Oxfam. Based on the data from Credit Suisse Group, the Oxfam study concluded that by 2016 more than 50 per cent of the world’s wealth will be owned by the wealthiest one percent of the population. In 2014, they owned just 48 per cent. The study attracted wide media attention to the increasing wealth gap. But is the gap in income and wealth alarming? Is it a problem?
I argue no. Differences in income and wealth reflect differences in productivity: those who produce more material values, earn more and accumulate more wealth, given no government interference. The production of more or better material values is good for us; they help us survive and enjoy life more. More of cheaper, more reliable energy is good for us. So are more effective medicines, more nutritious food, and better housing, or any other material values. We should encourage and reward, not blame and punish, those who produce them.
Yet, punishment of production is the effect of the statist schemes to reduce the inequality of income and wealth, whether highly progressive income taxes, corporate taxes, special taxes to the rich, or any other means of “re-distribution.” When you penalize producers, they move to other, less punishing regimes. Recall French President Hollande’s “millionaire tax” that a few years ago caused an exodus of the wealthy from France, or American corporations’ tax inversions (moving their legal headquarters elsewhere to avoid the relatively high U.S. corporate income taxes).
What the producers (those who invest capital in the production of goods and services) need the most is not government’s “re-distribution” of their wealth but freedom. Freedom to produce and trade whatever and with whomever you wish and to decide how to use the proceeds is an important incentive for wealth creators. The development of Hong Kong from a fishing village with no natural resources to the thriving center of business and trade is a positive example. For a negative one, consider the collapse of Argentina from one of the world’s wealthiest countries a mere century ago to the economic basket case today. Their fundamental difference: the freedom of producers in Hong Kong and the gradual curtailing of freedom by government force in Argentina.
Those advocating narrowing the income and wealth gap, from the Occupy movement activists to media commentators, fail to grasp (or evade) the primacy of production over consumption and the crucial value of production to human survival and well-being. One academic commentator recently argued that forced income equalization by government is in the self-interest of the wealthy (the producers): if income was more evenly distributed, more people could afford and would buy the producers’ output. That kind of argument, of course, begs the question: what enables the production of goods and services in the first place? What the commentator ignored was the fact that the more you take away from the producers, the less they are able to produce and to invest in cost-saving technology and product improvements. Initiation of physical force is not conducive to production.
Another misconception fueling the arguments for equalizing income and wealth is the myth that the wealthy hoard their money, like Uncle Scrooge of the Donald Duck cartoons who keeps his money sitting in an enormous vault. Most of the wealthy do not hoard their wealth. They invest it in further production, which benefits not just them but the rest of us in the form of larger variety of better, cheaper goods and services, or as employment and investment opportunities. And whatever they don’t invest or save, they consume. But that consumption is enabled by their production and does not take anything away from anyone else. Quite the contrary, their consumption creates trading—and income—opportunities for others.
The obsession with inequality of wealth and income needs to be countered with stronger advocacy for freedom of production and trade (which means government performing its proper role—protecting individual rights—and not interfering with markets). Freedom is the only means to increase human well-being.