Distributing Wealth by Force

"It's the story of the greatest wealth transfer in the history of the world."
--Jake Moore (Wall Street: Money Never Sleeps)

Income inequality is a natural and desirable feature of a free society. Precisely what the distribution of wealth looks like in a free society is unpredictable. We know that it will be dynamic, however, for it reflects voluntary cooperation among people to improve their circumstances--whatever their capacity for doing so.

When the scope of government expands beyond helping people protect their property to taking property from some people for the benefit of others, then the distribution of wealth becomes unnatural. It is a distribution shaped by force rather than by freedom.

Various policies shape the distribution of wealth unnaturally. The policies aim at doing one of two things: a) forcing wealth to be more even between people, or b) forcing wealth to be more uneven between people. Let's consider an example of each type of policy.

a) Forcing wealth to be more even. The centerpiece of US tax policy is the progressive income tax, which takes increasingly larger fractions of a person's production (i.e., the more you produce, the greater the percentage of production taken) for the benefit of others. If the production is redistributed to those who have less, then the result should be a leveling of wealth among people.

Political mischief, of course, may reduce the likelihood of that unnatural outcome in favor of another unnatural outcome--that of the politically connected siphoning off a significant share of the tax receipts for their own interests (which perversely could make this policy more type b than a).

b) Forcing wealth to be more uneven. Monetary policy also shapes distribution of wealth in unnatural ways. Current zero interest rate policy (ZIRP) of the Federal Reserve gives large financial institutions access to ultra cheap credit. Those institutions borrow as much as they can and then lever up to buy financial assets of all shapes and sizes--with the implicit backing of the government to do so. Because they are first users of newly minted money, these institutions can take control of assets while prices are relatively unchanged. By the time that money trickles down to the rest of the population, prices have been bid up. The late users have lost purchasing power and have gotten poorer vs the first users of printed money.

In addition to the bankers, those who own financial assets (stocks, bonds, real estate, etc) benefit from stimulative policies of the Fed. The Fed has said as much. However, most financial assets are owned by a small fraction of the population (i.e., the wealthy), meaning that policies aimed at elevating asset prices are likely to skew the distribution of wealth unnaturally toward the rich.

Although both types of policies are at work in the US, type b policies appear to have the upper hand. The rich are getting unnaturally richer.

This has proponents of type a policies shouting for more taxes on the rich. They want to add to the force already in the system. As in war, opposing forces do not cancel each other out. The damage done is additive.

The proper response is to remove force from the system.