To properly analyze an issue, one must start with a foundation of well-established facts. This sounds obvious, but a major pitfall in any analysis is that we tend to begin with unquestioned assumptions. If those assumptions are wrong, then our analysis will also be wrong. Therefore in this post we’ll review some economic basics to be sure that we don’t harbor faulty assumptions.
President Obama promised that he would provide a tax reduction to ninety-five percent of us by increasing taxes on “the wealthy.” This promise means that the president believes in Pizzanomics. That is, he believes if someone gets a big slice of income then the rest of us have to settle for a small slice, and this injustice must be corrected by “spreading the wealth,” i.e. taxing those who have more and giving the proceeds to those who have less. But a little engineering analysis will demonstrate, in plain talk, just how wacky the pizza pie theory is.
We engineers love to see test data; i.e. empirical or historical evidence that supports or refutes a theory. Is it necessary to “spread the wealth” to compensate for unfairness in our economic system? Despite what you may have heard otherwise, there is abundant and substantial evidence that supports the fact that money is not a pizza pie, and wealthy people do not prevent less fortunate folks from getting their fair share.
But let’s ignore all of that economic history for the moment, and instead use a simple mental analysis. Engineers and scientists call such analyses “thought experiments,” where logic is used to determine reasonable expectations. These experiments do not require advanced degrees or high IQs, they only require a methodical mind and the avoidance of emotional blockages. Let’s apply such a thought experiment to Pizzanomics.
If a person has a big slice (a lot of money), the Theory of Pizzanomics (espoused by believers in big government) implies that the slice is lost forever. The greedy wealthy person will eat the slice and that’s that: done, finis, adios amigo, burp; nothing left for you and me.
In reality, however, money is not gobbled up; i.e. rich folks do not hide their money under the mattress. Nor do they have big parties on the weekend at their mansions, where they and their rich friends get together and sip champagne and throw their cash into a big pile and roll around in it, cackling at how superior they are to average folks. No, they don’t use their money for such idle and frivolous pursuits, because then it would be of no use to them. They have to spend their money to get mansions and champagne.
When a wealthy person spends money, it flows from them to carpenters, mechanics, chefs, gardeners, servers, importers, distributors, truck drivers, sales assistants, and on and on. As a kicker, wealthy people also invest, which increases the flow, leading to more jobs for everyone.
The bottom line is this: money is not a pizza pie; money is a river. Because government is inherently highly inefficient (as we have discussed previously), the river flows best when government is not in the middle, splashing around and muddying things up.
Now, it’s true that some wealthy folks may be greedy and direct the money flow illegally. When the rich engage in fraud, price-fixing, or other crimes to feather their nests, the government should step in and prosecute such crooks. Likewise, government officials should be fired, impeached, or prosecuted for funneling taxpayer funds (“earmarks”) to their wealthy patrons to buy votes and favors.
However, assuming no criminal behavior, why don’t rich folks have the right to choose the direction of the money flow? It’s their money, after all, not the government’s. Plus it is only theirs temporarily, until it flows through them to others. In other words, being wealthy does not stop a single dollar from flowing to a less fortunate person. In fact, the more wealthy people there are, the better; the river gets deeper and wider. This is why it is illogical for regular folks to be envious of wealthy folks, and also why it is illogical for wealthy folks to feel guilty about being wealthy.
Envy And Guilt About Honestly Acquired Wealth Are Illogical
(If you care to debate the above, contrary viewpoints are welcome.)
The Economy Is Not A Pizza Pie (Part 2)