Coincidence made it so that an article written by John H.
Cochrane saw its central thesis demolished by another article; this one written
by Charles R. Schwab. Both articles were published on the same day, November
20, 2014 in the Wall Street Journal independently of each other.
John Cochrane wrote: “What the 'Inequality' Warriors Really
Want,” a piece that also came under the subtitle: “Confiscating wealth is
ultimately about political power. Koch brothers, no. Public-employee unions,
yes.” Charles Schwab wrote: “Raise Interest Rates, Make Grandma Smile,” a piece
that also came under the subtitle: “With the Fed's near-zero policy, households
headed by someone 75 or older have lost $2,700 annually in interest income.”
The central thesis of John Cochrane rests on the idea that
you either increase the wealth in which case most people will get wealthy while
some will get wealthier, or you redistribute the wealth and see everyone get
poorer. The way to increase the wealth is to adopt a system where market forces
determine the economy's performance with minimum interference from the
government. The way to render everyone poorer is to allow the government to
“confiscate” from the rich and give to the poor.
And so, Cochrane takes the arguments that were put forward
by what he calls the “inequality warriors” in support of the idea that
inequality is bad for the economy, and ridicules them one by one. What he does
not do is put forward an argument to show how or why inequality helps to
increase wealth. All he says in this regard is that there can be bad inequality
(such as that produced by crony capitalism, for example,) but there is also
good inequality where entrepreneurs start something new and get rich in the
process. In fact, he asserts that most inequalities are of the good sort.
This approach to understanding how an economy works is so
superficial, it can easily lead to the conclusion that the quest for fairness
in the distribution of wealth is based on envy. This point made, someone like
Cochrane can then push the philosophy further, and posit that the envy goes
further than the desire to lead an upscale lifestyle; it goes to the desire to
secure more political clout.
What he avoids discussing is what defines a market and by
extension what defines an economy. Here is that definition: A market –
therefore an economy – is said to exist when someone makes a product that
someone else exchanges for his labor or for a product he owns. With this
picture in mind, we can see that the level of wealth a system is said to have
attained, is determined by the ability of such system to produce as much as
possible, therefore consume as much as possible. This says that if you are an
economy which produces more than its consumers have the ability to consume, you
are not a wealthy economy. Also, if you consume more than the producers can
produce, you are not a wealthy economy either.
This leads to a philosophical certainty that is as precise
as mathematics. It is this: If the level of production is equal to 100,
therefore the level of consumption must also be 100 to reach 100% efficiency.
If you tilt the economy one way or the other, you have less efficiency than
that, therefore have a poorer economy that will affect everyone negatively. We
must, therefore, conclude that equality is not only a philosophical concept; it
is a mathematical precision.
How this works in real life is clearly demonstrated in the
Charles Schwab article. He tells what happened to 44 million senior citizens
who are nothing more to the economy than consuming units living off the savings
they have accumulated when they were working. It happened that the central bank
– which is independent of the government – made a market decision and adopted a
near-zero interest rate policy. This resulted in the seniors losing thousands
of dollars in interest income every year.
When the Charles Schwab Corp. did the math, they discovered
that 58 billion dollars in annual interest income were lost to seniors.
Factoring the multiplier effect into that, the result has shown a loss of 115
billion dollars to the economy, something like 0.7 % cost to the growth of the
GDP. And this could have generated an additional three quarter of a million
jobs.