3 Comments

  1. Vegas

    Roman, Amazon allows to fund charity organizations. Is there a legit Ukrainian war organization I can support through Amazon?

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  2. Beauregard

    January 11, 2015

    Income re-distribution is one of the great economic follies engaged in by the political class. Central planners believe they can alter income distribution without affecting income creation. Believing that income creation and income distribution are independent of one another is economic naivety of the worst kind. Statist propaganda proclaims its value in spite of the harm done to an economy.
    To understand the fallacy, assume for simplicity that an economy consists of only two working people — Mr. Productive and Mr. Unproductive. Mr. Productive works 70 – 80 hours per week. Mr. Unproductive works 30 hours per week and doesn’t expend much effort in the endeavor. Regardless of how we might feel about either situation, both people are obtaining returns commensurate with their abilities and efforts. Both are, at least in some fashion, satisfied with their situations. Either could increase or decrease his efforts but neither chooses to do so.
    Economists call this condition equilibrium. Either individual would consider his condition worse off by either working more or less hours given the rewards available. Sometimes this condition is explained as the point where the utility of an additional hour of work (pay) becomes less than the utility of the leisure that must be foregone to work that hour. The point is that both individuals have chosen their efforts based on the rewards and costs as they subjectively view them.
    Income Re-distribution
    Assume the GDP produced in this economy is $100, split $80 to Mr. Productive and $20 to Mr. Unproductive. Enter a self-appointed busybody who considers this discrepancy “unfair”and proposes to remedy it by taking some of Mr. Productive’s income and re-distributing it to Mr. Unproductive. According to this ignorant interventionist, no man should be entitled to four times more than another. A tax is implemented to alter the distribution of income. Mr. Productive’s income will be taxed and the portion taken will be redistributed to Mr. Unproductive, thus narrowing the income disparity.
    Prior to the tax, both men were satisfied with their effort-reward conditions. Both would be made happier with more income (more is always better than less, especially if it doesn’t require additional effort), but that is impossible given technology and the utility functions of the two men. In short, the most optimal (from an economic standpoint) arrangement existed before the tax intervention. The intervention will worsen economic well-being regardless of whether it improves the allocation of income/wealth in someone’s opinion. Only the busy-body and Mr. Unproductive can be made happier by the intervention.
    What Happens?
    In our simple example, the stasis of Mr. Productive and Mr. Unproductive is disrupted. Mr. Productive post-tax now receives less per hour for his efforts. That drops the worth of an additional hour worked below that of the marginal utility of an additional hour of leisure. Mr. Productive will re-establish his trade-off between work and leisure by reducing the hours he works until the utility/dis-utility equation comes back into balance.
    Mr. Unproductive receives a boost in his income independent of his effort. He will apply some of this additional income to additional leisure. In short, his hours worked will also decrease by some amount.
    The economy will now be smaller, say $95 instead of $100. The income of Mr. Productive will decrease and the income of Mr. Unproductive will increase, lessening the income difference. However, there will be less income/wealth under the new distribution. The economy will be smaller than it otherwise would be.
    President Lyndon Johnson declared a War on Poverty in 1965. Since then many trillions of dollars have been squandered trying to uplift the poor and diminish income inequality. The effort has been mostly a failure because of the tendencies discussed in the simple example. The overall economy (the pie) is necessarily smaller than it otherwise would be, reducing the per capita income that might have been. Whether it has succeeded in reducing economic inequality is moot. Here is a recent breakdown of income by population quartiles:

    What cannot be discerned from the above graphic is how much poorer the country is than it otherwise would have been without the War on Poverty. What can be discerned is that the income inequality still appears just as unsatisfactory to those who believe it was too extreme before the War on Poverty.
    Depending upon one’s ideology, the effort is deemed to have been an unqualified success or an unqualified failure. Charles Murray’s book Losing Ground argues that the programs instituted under this rubric reversed positive trends from the past for the poor and minorities, further widening the gap between the haves and the have-nots.
    (The official Washington line is that these programs were successful but did not do enough. As usual, more needs to be done.)
    The Lesson
    The production of income is not independent of the distribution of income. Altering the distribution of income changes the rewards and incentives in a way that the production of income will fall.
    Economic efficiency and equity are two different and competing concepts. Efforts to “improve equity” or “increase fairness,” at least as practiced by governments, always produce lower efficiency and per-capita income than would otherwise result. That outcome is true regardless of whether you are liberal or conservative. More equality in income achieved via force means less total income and wealth for a society. This cost or trade-off is considered necessary by some.
    The trade-off is obviously acceptable to those made better off. That includes the unproductive and the political class (but I repeat myself). Placating the masses is the means to power. A poor person’s vote counts as much as a rich person’s and there are many more poor than rich. In a country where principles are determined by majority rule, disaster is sure to result. As one wag suggested:
    Democracy is two wolves and a sheep voting on what to have for dinner.
    P. J. O’Rourke wrote a book entitled Eat the Rich describing how the unproductive would plunder the productive.
    Practical and unprincipled political policies are destroying the economy. Policy is driven by the lust for political power and “give me more.” These programs may be tolerable in the short-term, but they are a cancer on the productive sector of society. Economic and social destruction are the ultimate ending.

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  3. Beauregard

    Unfortunately the source and atribution of previous posting
    was cut in the copy and paste. So here is another posting
    by same author with citation to his web site. This guy did
    not make his money as an academic rather as investment
    banker. Yes he has Ph.D. in economics and has taught a
    little, but his scribings and comments reflect his experience
    with real world:

    Darkness is a Process and So Is Impoverishment
    April 21, 2014

    Darkness by Monty Pelerin
    http://www.economicnoise.com/2014/04/21/darkness-process/

    Darkness1Darkness is a process. Light departs slowly. At first,
    the process is almost imperceptible. Then the darkness becomes
    noticeable and the process seems to accelerate.

    Economies and countries move from light to darkness in
    similar fashion. It is a slow process until it becomes noticeable.

    The descent into darkness results from government and
    its policies. The descent will continue so long as government
    continues to pursue wrongheaded policies.

    The most wrongheaded policy of all is large government.
    Wealth cannot be created by government. Wealth is a
    function of real goods and services.

    Large government means greater support from the productive
    sector. Every dollar taken from the productive sector is
    squandered in the sense it cannot be used to create wealth.
    Small inefficient governments are more beneficial than large
    inefficient ones, or for that matter large efficient ones. Milton
    Friedman once observed that we should be grateful for
    inefficient government because it did less harm than it
    would if it were efficient.

    Government, beyond its minimal function of preserving
    property, destroys wealth. It doesn’t matter what its
    intentions or motives. “Noble” and “moral” government
    can only be small government. Government, once it exceeds
    its minimal size and efforts, becomes harmful. Large
    government is always pernicious.

    This country is now living off the capital it inherited
    from its ancestors. Ludwig von Mises referred to living
    beyond one’s means in such a manner as as “eating
    the seed corn.”

    Net wealth creation has not occurred for more than a
    decade and the process of wealth consumption is accelerating.
    As a result, our standard of living is declining.

    Wealth can only be produced by the productive sector. Any
    economy which siphons off the seed corn from this sector
    will see their economy decline. James Kunstler described
    the effects:

    Just a glance around the USA these days ought to
    nauseate the casual observer. We have an infrastructure
    for everyday life that is failing in every way imaginable.
    Are you disturbed by the asteroid belts of vacant strip
    malls outside your town? Or the empty store fronts
    along your Main Streets? What do you suppose these
    places will be like in ten years when the mirage of shale
    oil dissolves in a mist of disappointment and political
    grievance? How are Americans going to feel, do you
    suppose, when gasoline just isn’t there at a price they
    can pay, and they are marooned in delaminating strand-
    board-and-vinyl houses 23 miles away from anything?
    Does the sheer immersive ugliness of the human imprint
    on the American landscape not give you the shivers?

    Look at the pathetic and disgusting appearance of
    our cities, which for the most part present themselves
    as demolition derby arenas or war zones — except the
    strongholds of the red-white-and-blue oligarchs:
    Washington, San Francisco, and especially New York,
    Financialization Central.

    All calls for more government intervention are suicidal.
    Taking more of the poison that caused this condition is
    no remedy.

    Government has nearly destroyed the greatest Bread
    Machine the world has ever known. More “help” from
    this source will only worsen matters.

    In order to solve the problem, dismantle most of the
    State and the so-called Welfare Society. Otherwise
    the slide toward poverty and irrelevance will continue.

    Some day, people will awaken to their plight and its
    source. Make sure you are not a politician when that
    occurs.

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