The world is filled with ranters*:
*myself included

And you should watch it. It raises some interesting points.

Here’s the summary:

  • Some researchers found a reasonably large sample size of Americans.
  • They asked the sample to hypothetically split the US population into fifths.
  • And then take the US accumulated wealth of around $54 trillion, and allocate it between said fifths in two ways:
    1. What they think an ideal wealth distribution would be.
    2. What they estimate to be the real wealth distribution.
  • They then compared it to the actual wealth distribution.
  • The results:

I confess: at first, I thought the shocking part was how wrong the average American is about things.

But no. It seems that the most shocking part is the fact that you actually can’t see the bottom two fifths on the actual line.

Which did (I confess again) puzzle me somewhat. The thought that went through my head:

You mean to tell me that the poor don’t have any money?

But isn’t that why they’re poor though?

I mean, if they had money, then they’d be middle class. Or rich… So…

When I voiced this thought in a comment, there was a general slapping of my insensitive ideological wrist. There was also some swearing. And a death wish.

But actually, I refuse to apologise. There are many fallacies in that video, and in the rhetoric that surrounds US inequality in general (I’m not saying that it isn’t a problem – I just think that everyone needs to take a step back and breathe). I’m going to split those flaws into the following categories:

  1. Then go and be communist then.
  2. The numbers are stupid.

Here goes:

1. Capitalism is premised on inequality

To quote Churchill:

“The inherent vice of capitalism is the unequal sharing of blessings”

America has chosen capitalism, its “blessings” and free market theology ideology as her economic least of the many evils. Did she think that it wouldn’t contain any evils? Of course it does – the profit motive is foundation stone, root and cause of the Capitalist ideal.

Which makes inequality the engine of economic growth in a Capitalist system.

Let me put it this way: we work to become richer…than the people around us.

In any case, the alternative (at least in conventional thought) is the Benevolent Socialist Central Planner, who makes sure that all men are economically equal. So let me complete the Churchill quote I started with:

“The inherent virtue of socialism is the equal sharing of miseries.”

This is commonly known as the “size of the pie” argument: under socialism, everyone has an equal slice of a small pie; under capitalism, everyone has unequal pieces of a much larger pie – and even if you get a small piece, it’s bigger than what you would have had under socialism (in absolute terms).

So we should stop pretending that the American “ideal” involves an even close to equal distribution of wealth.

It does not.

2. What is missing from that graph and video?

When we talk about poverty and wealth and trillions of dollars, we are defining wealth levels are “money and assets held” or something similar. Alongside the implication that somehow, we all ought to do something about it.

Yes. It’s called “taxation”. And “welfare benefits”.

You go to any country, and whatever you might think about tax evasion and tax planning, the fact is that the richest people always pay the most tax.

Here’s another graph:

And what happens to that revenue collected?

It gets used to offer benefits like free education, food stamps and government-funded healthcare.

Let me put something like free education into perspective:

  • If you wanted to educate your child privately at a relatively cheap school for 12 years, it would probably cost you, say, $6,000 per year.
  • Let’s say that you wanted to own a relatively safe investment, earning 3% a year in real terms (high by current global standard), that would effectively pay for that $6000 each year for 12 years.
  • That investment would be worth $60,000.
  • To be clear: there is no real difference between having that investment, and having the right to free education for your child.

So we should take any person that has children in school and increase their wealth by the equivalent of any benefits that they receive.

You do that, and immediately, the bottom 85% of Americans are each $60,000 richer (after a quick Google search, it seems that 85% of all American children attend a public school).

Allow me to do this math in more detail:

  • In 2011, around $2.3 trillion was spent by the US government on Health, Medicare, Income Security, Social Security and Education.
  • The primary beneficiaries of these services are the now-infamous 47%.
  • Now, note that this is repeat spending. That is: in order to represent this as wealth, you would need to treat it as the yield or interest on some investment that would keep its capital value over time, and earn $2.3 trillion a year for spending.
  • Assuming a highly euphemistic return of 10%, this means that there is a $23 trillion effective wealth that is transferred to the lower classes through the Welfare State*.
    *A less euphemistic (but more realistic) rate of 5% would make this the equivalent of $46 trillion…

Because what’s the point of a welfare state if you can’t demonstrate how much richer you’ve made everyone through wealth transfers?

If you take the $54 trillion, and increase it to “effective” wealth of $77 trillion, you’re beginning to get a wealth distribution that looks a lot more like the “estimated” line.

Is it so strange that it looks like what it is?

3. What happens to Welfare Spending?

Finally, the point that often gets brought up is the worsening state of the inequality. And this graph:

And even this is not surprising because where do we think that the welfare money ends up eventually?!

The pattern:

  1. Government taxes the owner of Walmart.
  2. Government pays out welfare benefits.
  3. The welfare benefits get spent in Walmart.
  4. The owners of Walmart get richer.

The primary beneficiaries of welfare spending are the poor. The ultimate beneficiaries of welfare spending are the manufacturers of whatever the poor spend their money on.

You know what this means, right?

If you want to correct wealth inequality, you need to stop welfare spending.


You need to get your data right.

PS: for the record, I agree with the economists who think that wealth inequality is causing a serious problem for America. But I don’t agree that the problem is one of social injustice – the problem is an economic one that involves the different spending patterns of the rich and the poor. But I’ll deal with that in a later post.