The Benefits of Inequality

By Michael Tanner

Wednesday, March 11, 2020

Hooray! Economic inequality has decreased. Fewer billionaires exist today than yesterday. Bernie Sanders should be dancing in the street.

As of its close on Monday, the Dow Jones was down more than 2,000 points and the S&P had dropped almost 8 percent, down from its peak on February 20. The plunge obliterated more than $5 trillion in wealth, a good chunk of it belonging to those evil millionaires and billionaires. In fact, the net worth of the world’s five richest people — Bill Gates, Jeff Bezos, Bernard Arnault, Warren Buffett, and Mark Zuckerberg — went down $24.6 billion collectively on Monday, according to the Bloomberg Billionaire Index.

But while schadenfreude may be emotionally satisfying, it is poor economics.

Much of the Left (and the populist Right as well) buys into a fixed-pie view of the economy: If one person gets rich, someone else gets poorer. Therefore, the only way to lift up those at the bottom is to tear down those at the top. In reality, however, those average, working-class Americans that Bernie claims to champion are no better off today because Jeff Bezos is now poorer.

The economy is not fixed in size, with the only question one of distribution. In a free-market economy, one person’s wealth does not necessarily come at the expense of another’s. We should, in fact, be striving for a growing economy with more resources for everyone, but the stock-market decline and its associated loss of wealth may actually make that harder. And those who will end up suffering the most will be those who can least afford it.

That’s because very few wealthy people stash their money in a vault to swim in, like Scrooge McDuck. Their money is either saved or spent. If saved, it provides a pool of capital that fuels investment and creates jobs and opportunities for the non-rich. And if spent, it increases consumption, likewise providing employment opportunities for American workers. Remember when Congress tried to soak the rich by imposing a stiff tax on yachts? The U.S. boatbuilding industry cratered, and thousands of jobs (“good jobs at good wages”) went away.

That lost $5 trillion is money that will not be used to buy things produced by average working Americans or, even more important, invested to create new or better jobs. When Bernie says that billionaires should not exist, he is effectively saying that the businesses they invest in should not exist. How does that make us better off?

None of this is to say that every rich person earned his wealth openly or fairly. Crony capitalism remains far too prevalent in our society. Sound policy should get the government out of the business of picking winners and losers or rewarding the politically well connected. And we should fight government policies that are preventing the poor from fully participating in the benefits of economic growth.

Still, that is vastly different from the pursuit of economic equality for its own sake. In the end, we are better off being unequally rich than we are being equally poor.

The market will eventually recover from its current troubles, more likely sooner than later. Since 1945, corrections have lasted, on average, roughly 14 weeks. In the meantime, we can perhaps learn something about the limits of class warfare.