Santa Clause Economics … the illusion that redistribution can increase prosperity.

Santa Claus EconomicsSocialist politicians like Bernie Sanders and Hillary Clinton believe the path to prosperity is not encouraging everyone to create value themselves, but to redistribute what has been created by others.  Let’s examine the false premises and distortions inherent in their plans.

The Wall Street Journal added up the new Santa Clause redistribution plan Sanders has proposed that includes “free” college education for all, Medicare for all, expanding Social Security, paid family leave, bolstering private pensions, a youth jobs initiative, and infrastructure spending. The Journal came up with the figure of $18 trillion over ten years not including universal pre-school.  By the way, Bernie forgot to mention that many college degrees these days are worthless in terms of creating value for others and only send the graduate directly to the unemployment line.

Socialist Bernie says he will raise the money by taxing the “greedy one percent” (an income level reached by 12% of Americans) which already pays 45.7 percent of all income taxes. The federal government brings in about $1.5 trillion a year in tax revenue. Even if he confiscated 100 percent of the earnings of those making $1 million or above, he only would net $616 billion. Bernie’s math is way off.

Socialist politicians often claim that incomes of “the rich” are increasing relative to incomes of “the poor”.  Sometimes “the wealthy” are described as those who “have made nearly all the income gains” and they are “under taxed”. These statements are expressed in such a way as to give the false impression they are comparing incomes of specific sets of people over time … the “rich” and the “poor” where in fact they are comparing incomes of particular income brackets over time with an ever changing mix of people inside those brackets.

Politicians like Bernie seem oblivious to mobility in the market place. When hikes in the minimum wage kill entry level jobs, they remove the first rung on the ladder and threaten lifetime poverty for those starting out.  People typically move upward from entry level jobs as they gain more experience, produce more, or gain more customers. When income levels of specific individuals are tracked over time rather than abstract income sets … results show the flesh and blood rich are not getting richer, nor that there is an unchanging, wealthy ruling class structure.   

According to a study by the University of Michigan of specific individuals, among those starting in the bottom quintile in 1975, 95% had risen from it by 1991, with 29% having made it to the top quintile.  Meanwhile, those in the top quintile in 1975 had the smallest increase in both absolute and relative terms of any quintile in real income by 1991. Those in bottom quintile rose most in terms of rate and absolute amount when compared to those in the top bracket.

An Internal Revenue Service study discerned a similar pattern.  In the decade from 1996 to 2005, those in the bottom quintile saw their income rise by 91%, while those in the “top 1%” saw their incomes fall by 26%.

Over half of all taxpayers change quintiles in any decade. In the United States, most households (56%) at some point find themselves in the top 10% of incomes. It is not a specific social class that moves upward in income, but all Americans that work hard and earn more as they age. As noted, even the “top 1%” is a level reached by 12% of Americans at some point in their lives, but most stay there briefly. Over half of the 1% circle in 1996 had left by 2005. Most of the top 400 incomes (the billionaires) fluctuate in and out of their bracket as investments rise and fall in value.

Some make the absurd claim that “the rich are getting richer at the expense of the poor and middle class”.  This is nonsense rhetoric by the same people who flunked math since the absolute incomes of all classes rise regardless of what happens at the top.  Moreover, most households in the bottom quintile have no one working, so from whom are the wealthy “taking” if their supposed victims are not producing anything?

The path to prosperity is to encourage all to follow the Biblical principle to create value in our lives and be rewarded accordingly … not confiscate from those who do it very well or are ahead of us in years.  Prosperity begins with innovation in a climate of economic and political freedom. It thrives in free markets that reward risk, allow failure, protect property rights and regulate only as necessary. Along with countries like Israel and Singapore, these traits make the American economy one of the leading innovators in the world.  We still lead the world in patents, and we’re still inventing new business models like Uber and AirBnB.

But in the last 6 years regulations have choked creativity and prosperity.  Astonishingly, in a climate of “quasi-socialism”, Bernie’s much touted income inequality has increased. Promising to reduce poverty with welfare, the present administration has made it structural, and chooses to import even more poverty from across the border. The middle class groans under such burdens, and stagnates.  For the first since the 1970s, more businesses are dying than are being created. In 2000, the U.S. ranked second in the world in economic freedom according to the CATO Institute. Now, we’ve dropped to 16th.

The U.S. economy desperately needs a shot of capitalism and informed leadership.  It needs freedom from the failed policies of politicians like Bernie and Hillary, whose track record of performance inspire little confidence to say the least.

… Helmut Rudajs

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