The Road to Economic Hell is Paved with Good Intentions

Wealth redistribution is somehow becoming a vogue topic amongst the intellectuals of this country. Granted only President Obama is brave enough to say it, it hasn’t stopped liberals from veiled discussions of how best to spread the wealth. It comes in the context of raising capital gains taxes, hiking taxes on the upper classes, expanding Medicaid, refusing to reform Social Security, eliminating the estate tax, etc. Now you may look at those and think how well intentioned each of them is. After all, it is simply the government’s attempt to help those who have, for one reason or another, been unlucky enough to secure a middle-class lifestyle. To which I say, the road to hell is paved with good intentions.

Now that sounds a little harsh. To be honest, I share the intentions of President Obama and many liberal thinkers. I want the government to promote policies that will secure the brightest future for the greatest amount of people. But as the brilliant economist Milton Friedman once said,

“One of the great mistakes is to judge policies and programs by their intentions rather than their results.

Almost all government programs are started with good intentions, but when you look at what they actually achieve, there is a general rule. Almost every such program has results that are the opposite of the intentions of the well-meaning people who originally backed it.”

As well intentioned as “wealth redistribution” may be I can’t shake the fact that it feels wrong. At its bottom it requires taking money from someone and no amount of “good outcomes” can scrub it of that fact.

Apparently some people do not share my concern. A recent article in the Los Angeles Times argues that wealth redistribution is quickly becoming a moral imperative in our society. Their argument stems from the belief that the “gap between the wealthiest Americans and the poorest is bigger than at any time since the 1920s.” I say “belief” and not fact because the reality is actually in dispute (see here, here, and here).

Nevertheless, the writer uses the widening income gap to argue that there is a need for wealth redistribution. As evidence for this need, the writer provides the results of a study that show that Americans drastically underestimate the current gap between the very rich and the poor. The study also found that when asked what the ideal distribution of wealth was Americans said that they wanted the top 20% to own just over 30% of the wealth, and the bottom 40% to own about 25%. This contrasts with an analysis (again, disputed) that shows that the top 20% of individuals own 85% of the wealth.

Now, let me be the first to say that that doesn’t seem right.  And as the writer points out, in doing so, I join the majority of Americans who want to achieve a more equitable distribution of wealth. The question is, how do we fix it. The easy thought is to use the federal government as a lever to shift wealth from the upper classes to the poor.

In my mind there are a number of things wrong with the welfare state philosophy of “doing good with other people’s money.” The first, as Friedman mentioned is the fact that welfare programs almost always do the opposite of what they were intended to do. One of the primary examples is the minimum wage. The idea sounds great in theory because it, in theory, assures a living wage for people. In practice it has much more pernicious, if unintentional, results. Increasing the minimum wage ends with the unfortunate result that if a workers skills are not worth in the marketplace what employers are forced to pay then they will go unemployed.

Second, as Friedman pointed out, “very few people spend other people’s money as carefully as they spend their own.” This reality is made worse by the fact that when taken people’s money is wrung through two other spenders. The federal government must take the money through taxes. It then decides the best way to spend the money to decide what will do the most “good.” Some portion of this money is then given to those in need through various redistributive programs of the welfare state. Once again, having been given this money rather than having earned it, the recipients of the money are much more likely to spend the money in less economically productive ways. They are incentivized to save little, invest little, and waste much. Even worse, it creates a cycle of dependency that is very hard to break because it destroys the individual will to succeed on their own accord.

(Writer’s note: This is an argument against a redistributive system in the abstract it should not be interpreted as a diatribe against those unemployed during the recession.)

Third, and in my view most important, Friedman argues that “the only way in which you can effectively distribute the wealth is by destroying the incentives to have wealth.” In general, the amount an individual earns is directly in relation to the value of the goods or services he creates.  That is, people are incentivized to increase their skills, improve their products, or improve their efficiency because they know it will contribute to their wealth creation. Arbitrarily taking away the profits of an individual’s work through redistribution eliminates, to some degree, the desire to maximize their wealth creation.

There is no doubt that “redistributionalists” have good intentions. They perceive a problem and believe they have a way to fix it. Unfortunately, a closer examination of the specifics of such a plan reveals that it may have the opposite effect as that intended. In your attempts to shift wealth from the upper to the lower classes, you inevitably end up hurting those you meant to help. Rather than increase the role of government and welfare, we must increase the role of freedom and capitalism. As Milton Friedman concluded, “a society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”

by Brandon Greife, Political Director of the College Republican National Committee