Sunday, July 28, 2013

On the Fair Distribution of Wealth

In his July 24, 2013 speech, the American President Barack Obama made repeated reference to what may be called the fair distribution of wealth. What is that? Well, the best way to answer the question is to look at a fictitious example and draw inferences from it.

Let us say that the United Nation appoints you goodwill ambassador to go to the most primitive regions of the World and prepare the people there for the development that is moving in their direction, and the modern way of life that is about to hit them. To avoid seeing these people experience the famous “culture shock” that may disrupt their sense of cohesion, the UN gives you unlimited resources to do as you see fit.

You will have a printing press that will print real money you can distribute among the inhabitants. You will have a staff that will remain in touch with the rest of the world to order anything you ask for. And whatever you need will be shipped to you right away anywhere you find yourself.

Upon this, you go into a village where 12 families are established. You notice that they live mostly on the meat of the migrant birds and animals that pass through the area once in a while. But this happens so sporadically, that the people are forced to go through periods of feast and periods of famine – unable to control their destiny. You tell them they can have the control they yearn for if they will adopt some of the modern ways of living you came to tell them about. They say they are interested, and you start delivering your lesson.

You tell them that when the birds and the animals are abundant, they can eat well but they can also save some of the meat for when the birds and the animals do not come. They can do so because there is something called refrigerators, a number of which will be brought to the village. To this end, you instruct your staff to order refrigerators of the kind which are powered with solar panels during the day, and powered with the burning of animal fat during the night.

Because you also want the people of the village to learn about finance, you print some dollars and tell the head of each family that he or she can have a refrigerator only in exchange for money. You reassure them that you will show them later what they must do to earn the money. But for now, you will distribute the money among them so that they see how they can go about buying a refrigerator.

The first thing you do is probe the people to see if they can count. To your surprise, you discover they are good with numbers, even proficient in what some people in the advanced world might call “high” arithmetic. You start with the first lesson by giving each of them one dollar. You say there are 12 of you, each has one dollar, and there are 12 refrigerators. How much will each of you pay to buy a refrigerator? And they all agree each will pay one dollar to buy one refrigerator.

You take back the dollar bills and give each of them 100 dollars in various denominations. You ask: How much will each of you now pay for a refrigerator? And they answer 100 dollars. Very good, you say, but you let them know that unfortunately, you do not expect to receive 12 refrigerators. There may only be 6 of them coming to the village. What will they do? They think about it for a moment, and someone says: I shall get together with my sister and bid 200 dollars for a refrigerator we will share between us.

You ask if the others will do the same, and four more heads of family say they have a brother or a sister with whom they will share a refrigerator. This leaves two unrelated families who are nevertheless good neighbors, and they decide they will pool their money to buy one refrigerator to use between them. But you caution the people of the village that all the refrigerators are not here yet except for 2 which are in storage near the village. The other 4 may take a long time before they come. And 6 more after that may or may not come.

You now grab the basket that was sitting beside you filled with money. You walk to the people and randomly clutch fistfuls of bills that you hand to each head of family. When all the money is given out, you get back to the podium and say to the people you don't know how much each of them has, but there are 2 refrigerators on which they can start to bid.

One head of family says he has 300 dollars, and he bids that much for one refrigerator. Another head says he has 500 dollars, and he bids for the other refrigerator. A third head says he has 1,000 dollars, and he bids for the first refrigerator thus topping the person who bid 300 dollars. A fourth head says he only has 200 dollars which means he must be out of the bidding game. The fifth says he only has 250 dollars, and he too must be out. The sixth head of family joyfully declares that he has 3,000 dollars, and he bids 1,500 dollars for each of the 2 refrigerators. He will take them both, leaving nothing for the other people.

Someone in the audience cries out this game is unfair. And you ask: Why is it unfair? The answer comes back: “Because of the way that the money was distributed.” Upon this, a general discussion ensues during which time two important points are made. First, it is pointed out that a more equitable way must be found to distribute the money than just handing it out. Second, it is reckoned that the person who will get the two refrigerators will never have to go out and hunt again because he can now store the meat for the others who will have to pay him with some of what they catch. This one has got it made; he is set for life.

And this is when the people of the village ask you: How is the money distributed where you come from? You scratch your head, and you admit to the people of the village you're not sure it is done in a fair way. But you have something in this regard they may wish to hear for themselves. You tell them it is the recording of a speech given by President Obama of the United States of America. Here are some passages:

“I spent a year traveling and listening to stories of workers losing their jobs, of teachers whose salaries weren't keeping up with the rising cost of groceries, of young people who had the drive and the energy but not the money to afford a college education. These were stories of families who worked hard but felt like the odds were stacked against them. In an earlier period, whether you owned a company or swept its floor, this country offered you a sense that your hard work would be rewarded with fair wages.”

“But over time that engine began to stall. Washington doled out bigger tax cuts to the very wealthy and smaller minimum wage increases for the working poor. Used to be that as companies did better, as profits went higher, workers also got a better deal. And that started changing. So the income of the top 1 percent nearly quadrupled, but the typical family's incomes barely budged.”

“So in many ways, the trends that I spoke about of a winner-take-all economy where a few are doing better and better while everybody else just treads water – that's a problem. This growing inequality not just of result but inequality of opportunity is not just morally wrong; it's bad economics because when middle-class families have less to spend, businesses have fewer consumers and the economy as a whole suffers.”

And the people of the village ask you if this is what you're bringing to them. You admit you're not sure it's the best thing in the world but it is unavoidable. So get used to it.