Tuesday, July 06, 2010

A defense of "spreading the wealth around?"

I just finished reading The End of the Free Market by Ian Bremer. Great book (and fairly quick read), describing the differing approaches to market based capitalism in the West, which has a fairly free-market approach to the economy, and in other nations, most notably China, which use capitalism and markets but have a much heavier government hand in them.

The central thesis of the book - which makes sense to me - is that there are two main models for capitalism (across a broad and continuous spectrum). In the "free market" model, exemplified to varying degrees by the US, Japan, and most of Europe, the goal is economic growth. In the "state capitalist" model, best exemplified by China and Russia, markets are used primarily to preserve and strengthen political power; wealth creation is not an end unto itself, but rather a means of keeping stability.

Bremer obviously goes into a lot more detail about the consequences of this, and I recommend the book, but it got me thinking about a slightly different issue.

Back in the campaign, Obama got flack for saying that we need to "spread the wealth around." And I realized that there are two ways that this phrase could be interpreted.

If one assumes that Obama is an unrepentent leftist/socialist/communist, one could reasonably interpret "spread the wealth around" to be a Robin Hood call to take from the wealthy and give to the poor. If that's what he meant, then I condemn the statement on just about every level as being a bad and immoral idea. For just a few examples of failures to "spread the wealth" in this way, look no further than the Soviet Union of a hundred years ago, or Zimbabwe of ten years ago.

But there's another, far more benign interpretation of what he said. (And while I believe this interpretation is what he meant, I'll leave it to you to decide which he meant.) That interpretation is that we need to make sure that the opportunities for wealth creation are broadly available. I.e., we want to have a dynamic, broadly diversified economy, which makes it possible for anybody who is willing to work hard to do well for themselves.

I've blogged before about how I don't think that the income gap is a problem per-se, rather it's a symptom of a concentration of economic opportunity, and that likely is a problem. After all, the United States is wealthy and stable today in large part because it has done well at creating this broad base of opportunity. One need only look at other countries where the economy is highly concentrated in just a few sectors (such as, say, oil) to see that concentration of economic activity is almost always a bad thing.

And it makes sense that it would be a curse: after all, if the government is reliant upon a single industry for the majority of its revenues, then one should not be surprised when that government nationalizes the industry, or when it ignores or mistreats the bulk of its people (from whom it generates no meaningful revenue) in order to satisfy the goals of the cash-cow industry. After all, the old adage of "he who pays the piper calls the tune" applies - it's only natural that governments will become corrupted by dependency on concentrated economic power.

This is why an income tax or a VAT, or something like that is actually a good thing. I don't mean that as a defense of high-taxes; I don't advocate high taxes at all (merely sufficient taxes to pay for the spending and debts we incur.) But the beauty of these sorts of taxes - when not overly burdensome - is that they are broad-based. This means that the government must be responsive to the population as a whole because they are the source of its revenues. And it gives people some "skin in the game" - they can hold their government accountable because they are paying the bills.

In other words, if you want to "spread the wealth around" as a way of directly treating the symptom of a wide income gap by punishing the rich to give to the poor, you are asking for trouble. But if you want to "spread the wealth around" by making sure that we have a strong, broad-based economy with lots of opportunities, which will have as a side-effect the growth of the middle class (and a corresponding narrowing of the income gap - which is absolutely a form of "spreading the wealth around"), then I think this is something to which we should all aspire.