Mobility of Capital Trumps Class Warfare

By Robert Maynard

Senator Sanders is up to his usual class warfare tactics again. The occasion this time is the battle going on in Washington D.C. over deficit reduction. The Republicans want to address our budget issues solely with spending cuts and argue that high taxes already put us at a disadvantage when it comes to economic competitiveness. In a letter to President Obama, Bernie has this to say:

“This is a pivotal moment in the history of our country. Decisions are being made about the national budget that will impact the lives of virtually every American for decades to come. As we address the issue of deficit reduction we must not ignore the painful economic reality of today – which is that the wealthiest people in our country and the largest corporations are doing phenomenally well while the middle class is collapsing and poverty is increasing. In fact, the United States today has, by far, the most unequal distribution of wealth and income of any major country on earth.”

It should be noted that Senator Sanders does not have much of a track record when it comes to addressing our spending crisis and now seems to be more interested in using this moment as a chance to plug his class warfare scheme. Two things that he may want to consider are, first, that a more even distribution of wealth over time occurs when there is more mobility of capital. Second, is that our modern Information Age economy makes targeting the wealthy more and more like trying to capture the wind in your hand.

A 1995 study by the Federal Reserve Bank of Dallas gives a picture of the relative income equality that is achieved over time when there is greater income mobility:

“Tracking individuals’ incomes over time gives a startlingly different view of the forces shaping America’s income distribution. Let’s begin with the people who were in the bottom fifth of income earners in 1975. The conventional view leads us to think they were worse off in the 1990s. Nothing could be further from the truth. In the University of Michigan sample, only 5 percent of those in the bottom quintile in 1975 were still there in 1991.

Even more important, a majority of these people had made it to the top 60 percent of the income distribution-middle class or better-over that 16-year span. Almost 29 percent of them rose to the top quintile. This is a far cry from the popular vision of a society in which the poor are getting poorer. In fact, the evidence suggests that low income is largely a transitory experience for those willing to work, a place where people may visit but rarely choose to live.

There’s further evidence that being in the low-income bracket isn’t, for a large majority of people, permanent. Less than 0.5 percent of the sample showed up in the bottom quintile every year from 1975 to 1991. Nearly a quarter of those in the bottom tier in 1975 moved up the next year and never again returned. More than three-quarters of the lowest 20 percent in 1975 made it into the top 40 percent of income earners for at least one year by 1991. In fact, the poor made the most dramatic gains in the income distribution. Those who started in the bottom quintile in 1975 had a $25,322 average gain in real income by 1991. In the top quintile, the increase was $3,974. In other words, the rich have gotten a little richer, but the poor have gotten much richer.

The patterns are similar in other quintiles. Among the second poorest quintile in 1975, more than 70 percent had moved to a higher bracket by 1991-with 26 percent going all the way to the top tier. From the middle grouping, almost half of the income earners managed to make themselves better off. A third of the people in the second highest quintile made it to the highest fifth during these 17 years. All through the University of Michigan data, there’s a consistent, powerful thrust toward the top of the income distribution.”

In short, the key to a relatively more equal distribution of income is to have a greater mobility of income through greater economic opportunity. Removing the stifling hand of government and letting the free market work best achieves this. Having politicians and political bureaucrats confiscate and redistribute wealth only created new classes based on political connection.

As to the second point, the same Information Age dynamic that speeds up the mobility of capital also makes it easier for successful entrepreneurs to escape the increasingly futile attempts of political figures to confiscate their wealth a redistribute it. As pointed out in this American Thinker article, successful entrepreneurs do not go on strike in some “Galt’s Gulch” as depicted in Ayn Rand’s “The Atlas Shrugged” when government bureaucrats try to stymie their wealth producing activity, they simply move that activity elsewhere.

“Unless wealth is treated properly, it migrates to places where it is wanted and treated with respect. As expressed by Mr. Root:

The high tech revolution has freed businessmen to run their businesses from anywhere in the world. The same high tech tools and toys that toppled a powerful and invincible 30-year dictator in Egypt and now threaten to topple powerful leaders throughout the Arab world, also offer mobility and freedom to U.S. taxpayers. Obama better learn the lesson of Mubarak before millions more business people decide they do not need to put up with looters, free loaders, and politicians who despise them.”

So, what is to be done? The article offers a suggestion:

“A reversal of Western governing philosophy that has dominated for over a century is required. If it occurs, it is not likely to occur quickly. It will be incremental and take generations to accomplish. Talent and capital driven away will not return easily or quickly so long as other societies provide more favorable climates for entrepreneurs.

Competitive downsizing of government is likely once some societies decide to compete for prosperity. Few governments look forward to that, but the movement will be driven by those who understand that a smaller piece of a larger pie is better than a bigger piece of nothing.”