Thursday, January 15, 2015

Economy: Some Thoughts About Inequality

(Drivebycuriosity) - It seems that the media is obsessed with income inequality. There is a deluge of articles about the "rising inequality" in the US and Europe. Often I read the rant "the rich get richer and the poor get poorer". And Thomas Piketty’s inequality bible "Capital in the Twenty-First Century" is on the top of the bestseller lists.

I believe that the obsession with other people`s wealth (bloomberg) is merely a media hype. Julia Roberts charges $20 million per movie and so do Leonardo DiCaprio, Robert Downey Jr. and other Hollywood stars  (thedailybeast  hollywood businessi). So what? The golf player Tiger Woods earns $61 million a year and has made $1.3 billion in his career (forbes). Football, soccer and baseball stars also collect huge amounts of money. I don´t see any complaints about the outrageous rich Hollywood stars and sports celebrities in the media. The public seems to see just the wealths of company CEOs and the huge bonuses and fees collected by top-bankers and hedge fund managers.

Julia Roberts, Robert Downey Jr. & Co. are paid tons of money because their employers - the Hollywood studios  - believe that these superstars can attract so many movie goers that they will gain more money than they spend for these actors. The names of some megastars can create blockbusters (but not guarantee them of course). Even "underpaid" supporting actors and the rest of the cast could benefit when they participate in a major movie besides some mega--stars because they gain reputation.

Advertisers and owners of sports teams pay Woods & Co. extremely high sums because they believe that the sport stars will fill their cashes. Investors grant the CEOs of their companies extremely high bonuses because they hope that the company leaders raise the value of their stocks more than they cost. Since Apple CEO Tim Cook started his job the market capitalization of the company doubled to a record $700 billion ( cnbc) (even that the rally had more causes of course).

Many liberals claim that inequality is not simply unfair but harmful. I don`t agree. Do you and I get poorer when Mrs. Roberts, Mr. Woods & Co. inflate their banking accounts? I don`t think so. I  don´t believe that the wealth of the majority will shrink even when some people get absurdly rich and the number of billionaires rises. Quite contrary, a high & rising inequality might even be necessary for economic growth and therefore create more wealth for everyone.

Capitalistic countries with a high income inequality like the US, Switzerland, Singapore, Hong Kong and others have been growing much faster than their more equality balanced neighbors and their average populations are wealthier than the citizens of the rest of the world. The US for instance has a higher income inequality then France, but the US economy does better than the French. The US might have more billionaires then France (relative to the whole population) but  the US  unemployment rate dropped to 5.5% while the French unemployment rose to 10.4%, the highest reading since 1998. Countries with the highest equality - Cuba, Venezuela, North Korea -  also belong to the poorest nations in the world.


                                                       The Big Historic Experiment

In the last century a gigantic economic experiment happended: A whole country got divided  in 2 different parts. One part was communistic organized, with a low income inequaltity, the other became capitalistic, with a high inequaltity. After around 40 years the experiment got aborted. Guess in which part the masses (average population) got much richer and in which the average citizen stayed poor?

The experiment was the division of Germany into the (more or less) capitalistic Western Germany (Bundesrepublik Deutschland) and the communistic part (Deutsche Demokratische Republik = DDR) in the  late 1940s. In the year 1990 Germany re-united. Then the Western part (and its whole population) was much wealthier than the Eastern part. Even the population of Western Berlin, which had been a capitalistic island in a socialistic ocean, was much wealthier than the residents in the  former socialist Eastern Berlin.

I agree with James Pethokoukis from the American Enterprise Institute who writes that "dynamic, prosperous economies that push the technological frontier are likely to have a relatively high level in income inequality" (aei). Maybe "dynamic, prosperous economies" need a high income inequality as an incentive. I think the chance to become outrageous rich could be a motivation to invest and to take high risks. Someone who sacrifices time and energy and takes high risks wants a reward. And some people like Julia Roberts & Steve Jobs have or had extremely rare talents which get rewarded.

Scott Winhsip from Manhattan Institute writes:" The prospect of vast economic returns might, for instance, incentivize more innovation and investment, producing stronger economic growth and higher incomes even among those who do not amass fortunes. By rewarding work and human capital investment, inequality between the upper middle class and the poor could also promote stronger earnings growth for everyone over time." (economics21).


                                                 Rewards For Taking Risks

The possibility to amass huge fortunes - which exists in the US but did not in the Sovjetunion - creates a climate for entrepreneurs like Bill Gates, Steve Jobs, Mark Zuckerberg, Elon Musk (Tesla), Larry Page (Google) and more. These people aren`t robber barons, often they provide useful services for the society. I doubt that companies like Microsoft, Google, Facebooks could have evolved in countries where high risks are not appropriately rewarded. By taking risks Musk, Page & Co. are driving innovation and econmic growth, creating wealth for everybody. The innovators generate new products, services and jobs. Even China`s communist government is aware of that and permits enterpreneurs like Alibaba founder Jack Ma to become a billionaire.

The media is also obsessed with the outreagous consumption of the one percent, their yachts, their mansons, their art collections and so on. But does anybody get hurt when a Wall Street moguls own mansions stuffed with Picassos and Warhols (billionaires)? Do we get poorer when a hedge fund manager buys a Rothko for $50,000 million? (wsj). The consume expenditures of the one percent usually don´t compete with the consume of the average people, they might eat more beluga caviar, but they don`t eat more bread, rice and noodles.

Often the rich donate their fortune to museums, universities and other public institutions. Collections like the Guggenheim, New York`s MoMa and other  museums in the US are usually financed by donations and often show art work which is loaned by some rich people.

It think the cult around Piketty and the bluster about income income equaity are based on envy. The aversion against the extreme wealth of Mark Zuckerberg, Bill Gates, Warren Buffett and likes obstructs the fact that the average person in the West is much richer than people in  (youre-rich). There might be rising inequality worldwide but it is clear that life for everyone got better in the recent decades (spectator).

PS: For illustration I chose Daniela Rossel`s portrait: "Inge and her mother Ema in the living room" (from "Rica and famosas" series, 2000, Chromogenic print)  The artist is known for her portraits of the rich and famous in Mexico. The second image is from the same artist.

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