The Wealth Inequality Debate: Why Wealth Redistribution is Not the Answer

In these online discussions about wealth inequality, a solution that frequently comes up is wealth redistribution. A utilitarian argument is often invoked that if the wealth of the very top were spread among many people, there would be ‘more good’.

It’s pretty easy to demonstrate why this argument fails. As discussed in Elon Musk Schools Twitter
, the ultra-wealthy simply don’t have enough money to make much of dent in overall government spending, because there are too many people. There are too many people and too much spending. It’s not like when grandma dies and there is a $3m estate to split among 5 siblings, but it’s more like $3 million split among a million people.

The Forbes 400 as of November 2017 have a combined wealth of $2.8 trillion. If all that wealth were forcibly confiscated, it would pay for about 3 year’s worth of entitlement spending. If that wealth were spread among 200 million adult Americans, each would get $14k, but only for a single year. Assuming billionaire wealth grows at 5% a year, the next year there would only be $135 billion to spread, or about $700 per adult American. Although the lower classes have a higher marginal prosperity to consume, the ROI is poor, and after the initial wealth is spent, diminishes rapidly. Walmart, Amazon, and Target, for example, would get a temporary boost in sales, but there would be no long-term economic gains nor innovation (because the marginal returns for Walmart from the additional spending are low).

What about donating the money to impoverished Africans (a solution often proposed by effective altruists). Yes, by non-western standards a few dollars goes much further. But the problem is, if you give an impoverished African $5, he cannot buy $5 of Western goods, but rather $5 worth of whatever his village or town can produce, which isn’t much. So this means more maggot-infested food and water and bigger straw huts.

That’s why a supply-side approach may be superior to a demand-side one. Wealth due to innovation is recurring, not one-off. Raising standards of living seems like a more practical approach; for example, if the $3 million were used to create a technology that gives everyone the equivalent of >$3 utility, rather than just giving everyone three extra dollars to spend. But spreading that $3 million among 10-100 of the smartest people as measured by IQ, although the antithesis of egalitarianism, would generate much greater long-term ROI in terms of innovation and entrepreneurship, which is my motivation for supporting a high-IQ basic income, although it would not be funded by wealth redistribution.