Friday, March 25, 2011

Did the economic crash make us better off?

Over the last few years the country has been in an economic crash. Unemployment went up, defaults on mortgages skyrocketed, unemployment went up and numerous businesses went bankrupt. So why aren't people cheering?

Has anyone noticed poor people dancing in the streets because of the downturn? I don't think so. On the face of it we would assume the idea itself is absurd.

The Fed put out a report, Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009, that reports: "All the measures of income change presented here suggest that income increased for families with income near or above the 2007 median and income fell for families with income near or above the 2007 median."

In English they are saying that the downturn in the economy reduced the income of people in the top half of the economy more than it harmed those in the bottom half.  This means that economic inequality declined. But does that matter?

I have never understood how I am harmed if Bill Gates increases his wealth at a faster pace than I do. Nor have I figured out how I benefit if his income declines 20% while mine goes down 10%. I am not hurt by him having wealth, my well-being is determined by what I have, not by what my income is relative to his.

All things being equal, if we increased the income of the poorest 10% of the nation by 10%, and increased the wealth of the richest 10% by 20%, inequality of income would increase but the poorest people are better off. My well-being does not increase if I am able to impoverish others, nor is their well-being enhanced if I am made worse off.

Increasing the wealth of the poor does not harm the rich. Quite the contrary. The more wealth there is in the economy the more jobs that are created, the more profit opportunities that are created, the more new products that come into the market, etc.

The depoliticized market is not a zero-sum game where the benefits of one must always come at the expense of another. Government, however, is a zero-sum game. It takes from some to benefit others. It destroys jobs in one sector in order to create jobs in another sector. Government interventions in the exchanges of consenting individuals has two effects. One is that it acts on a drag on all such exchanges because it imposes costs on everyone. This is widely understood.

But, it also acts in ways that redistributes income, not from the people to the political establishment but from one class of citizens to another class. Gay couples pay social security taxes that are used to subsidize married heterosexual couples and their social security benefits. Poor people are taxed with regressive gasoline taxes so that government can redistribute those taxes to big energy corporations and better-off farmers in the form of ethanol subsidies. We have mass transit systems that are subsidized by gasoline taxes yet the average driver tends to be poorer than the average mass transit rider. And none of this takes into consideration the vast sums consumed by the politicians and bureaucrats, most of whom are far better off than the average citizen, used to run the vast system of redistribution.

Increasing wealth for all benefits all, even if some see their income income increased at a greater rate than others. The goal is not equality of wealth but prosperity for all. And, like it or not, the best way to secure that is through voluntary exchanges in depoliticized markets.

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