Thursday, November 06, 2008

Poor Dad & Rich Dad

The title of this post sounds as if we've heard it somewhere. There's no difference in such a debate on economic inequality between in Japan and in the US.

Do you hate the capitalist society? Long time ago some social revisionists tried to transform the capitalist society into the communist society to make the people's live better off. However, such a great trial failed as a result. Ironically, they became poorer and poorer in the communist world while they became richer and richer in the capitalist world.

Why? That's the today's question to answer and might be one of the great economic debates.

Poor Aren't Poor Because Rich Are Rich, By Robert Samuelson

Thousands of well-paid investment bankers, traders, portfolio managers and security analysts are losing their jobs. Though Wall Street bonuses will continue, their total is likely to decrease. Gains in executive compensation may be similarly squeezed. Profits are down; the political climate is hostile.

In 2005, the richest 1% of Americans had 18% of total income and paid 28% of all federal taxes, says the Congressional Budget Office. Their income won't grow much. Even if higher tax rates increase government revenues, the effect will be less than before.

Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap — though still vast — between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn't better off.

By and large, the poor aren't poor because the rich are rich. They're usually poor for their own reasons: family breakdown, low skills, destructive personal habits and plain bad luck.

The presumption implicit in the criticism of growing economic inequality is that society's income is a given and, if the rich have less, others will have more. Up to a point, that's true. The government already redistributes much income, often for the good.

During the boom years, companies might have been less lavish with top executives and slightly more generous to other workers or shareholders. Some new fortunes stem from self-dealing and financial razzle-dazzle, not the creation of real economic value. It's just desserts that some of this wealth has evaporated.

But the redistributionist argument is at best a half-truth. The larger truth is that much of the income of the rich and well-to-do comes from what they do. If they stop doing it, then the income and wealth vanish. No one gets it. It can't be redistributed because it doesn't exist. Everyone's poorer.

This isn't just theory. Last week, Gov. David Paterson of New York pleaded with Congress to provide emergency aid to states. Heavily dependent on Wall Street for taxes, he testified, New York faces a $12.5 billion budget deficit next year and expects joblessness to rise by 160,000.

Wall Street bonuses will drop by 43% and cap gains income by 35%, he estimated. People in New York would be better off if the securities industry were still booming, even if there were more economic inequality.

Americans legitimately resent Wall Street types who profited from dubious investment strategies that aggravated today's crisis. And government properly redistributes income to reduce hardship and poverty.

But that's different from attempting to deduce and engineer some optimal distribution of income. Government can't do that and shouldn't try.

Scapegoating and punishing all of the rich won't do us any good if the resulting taxes dull investment and risk-taking, discouraging economic growth that benefits everyone.

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