The Dismal Economics of Utopia
Spreading the wealth around forces massive inequalities. Duh.
April 18, 2010 - 12:00 am
Imagine a point in our bright future — a glorious time! — when all incomes will be equal. Perhaps this wonderment shall be accomplished by a new global Enlightenment, perhaps it will arrive by fiat: all incomes, the narrowly passed legislation will read, shall henceforth be equal.
Equality at last! Oh, the unbridled joy of knowing that everybody else is finally no better than I am! President Obama’s stated goal of redistribution, at least in terms of income, will have been realized.
If the afterlife which these men said does not exist actually does, Marx, Godwin, Condorcet, and similar intellectual giants will smile down in pride from there, basking in the knowledge that the adolescent human race has finally grown up.
What are the consequences of this fairness?
The exact number of people alive when the blessing comes upon us is irrelevant, as is the mandated income, but suppose it is $50,000. Now, as most economists do, let’s look at the distribution of household income (I owe this example to Thomas Sowell).
The mean household income will be about $116 thousand. About 40% of households will make that much or less, and 60% will make more. Now, $116 thousand makes the people who only pull in $50K look poor: that is, equality will force about 16% of the population to be “poor.”
What about the rich? Depends on what “rich” means, of course, but take $200K as a starting point. That is, after all, four times as much as the “poor” make. About 37% of households will be “rich.” The really wealthy household incomes start around $500K. Just less than 1% of all households will make at least that much.
What about the households of the Bill Gateses and Carlos Slims of the future? Those households which make more than $700K? As now, they will be a rarity: just over 1 out of every million households will be obscenely rich.
What’s going on? Everybody is equal by law! How can there be rich and poor when everybody receives the equality-salary of $50 thousand?
Easy: households are not comprised of equal numbers of people. Some households have just one person, more have two or three, fewer have four, and fewer still have five or more. The exact distribution isn’t important; I picked one in common use by demographers.
The artificial creation of rich and poor households derives from the socialist goal of equality, which demands that every person receive the same income. And “every person” by definition includes infants, the aged, and everybody in between.
“No fair!” you might be thinking, “Your example is silly. Everybody knows that equality does not mean awarding equal salaries to babies and the residents of nursing homes.”
Everybody does not know that. If you lust for equality, the burden is on you to define exactly what “equality” means.
Socialists and other utopians are usually content to let this definition float, and let its fuzziness work to their advantage. This sly trick puts realists on the defensive, who are ever nervous about making statements that might be judged hostile to equality.
So far we have had a hint of the large-scale corruption that occurs when incomes are reported by household. Let me show you how you can go from poor to rich by the flip of a switch.
In real life, most households have one or two bacon suppliers. Some have none, some have three or more. Suppose, judging it to be absurd to award infants a salary (and not every socialist would), equality is defined to mean that each household is only allowed to have one income.
Then the mean household income would indeed be $50K. And there would be no rich and no poor households because each household earns exactly the same.
But consider per capita income. Sixteen-percent of the population will make an average salary of $50K, 24% will make an average of just $25K. These people are rich compared to the roughly 1% who will average just $6,500, and the 1% bottom-of-the-barrel poor who will average about $4,000 or less.
Best of all, our new definition of equality ensures that those who used to be rich under the old definition are now poor! In the new definition, larger households are penalized, under the old they were rewarded.
This result also assumes that people of all ages go into the averages. But neither this nor the first analysis need that assumption. We can eliminate babies: the artificial creation of rich and poor happens even if you consider only “adults.”
Perhaps utopia can still be found by eschewing household statistics and considering wealth instead of income? It cannot. But that is a lesson for another time.