The Equal Distribution of Wealth

Equal Distribution of Wealth

A few days ago I heard a man, an economics professor, say that the United States would be better off and more successful if every person was paid equally, if the GDP were really per capita. This man proclaims to be an Adam Smith, laissez-faire follower. I thought that this kind of a system, where everyone receives equal pay, would not work and would collapse the United States’ economy in a matter of days if not hours.

The GDP in the United States in 2011 was $12,982 trillion. With a population of 310,000,000 people in the U.S. that means the GDP per capita is $41,877. Now if everyone would be paid the same every year and if the combined amount of those payments could not exceed the GDP our economy, as we now know it, would not be able to survive very long at all. What would it do to the incentive to work? What would it do to investments? What would it do to start-up companies? What would it do to the real estate market? These are vital questions that are very complex in their answers. But, here in this short article, hopefully we can get somewhat of an understanding.

What about having an incentive to work? This is a term regularly used in economic debates. The socialist economy provides little to no incentive for people to go to work and excel at their job. Why is this the case? Pride and selfishness play a huge role in this. In order for someone to excel and prosper at their job they have to know that they will receive some kind of remuneration for that work. If they do not receive some kind of incentive they will not work hard and will lose the inventive process that made this country what it is today. A man who is asked to work extra hours and receive no extra pay or compensation for his work may work those extra hours, but he will not be as productive as he could have been had there been an incentive for him to work that much harder. This is easy to understand so we will leave it at that.

Now, another aspect of this question is what would happen to big business if the CEO and all the top executives only received $41,877 per year for their work? There is a reason for huge companies to hand out huge salaries to high ranking members of the organization. If there was no high salary, perks and benefits there would be no incentive for people to seek or have those jobs. Why would you go through all the stress and pain that is necessary to manage General Motors or Chase Bank if you knew that you would only receive as much as the rest of the employees, who do far less work than you do. The CEO of General Electric would quit and get a job doing the least amount of work he could, why work if you’re not going to get paid what it’s worth? So here is the big issue, these top positions would be vacant and nobody would ever want to do these jobs. But, if nobody is there to do these jobs that means all the huge businesses here in the U.S. are going to go out of business. Wal-Mart, for example, has roughly 2.1 million employees worldwide. If the people running Wal-Mart found out that tomorrow their salaries would be cut to $41,877 per year do you think they would stay with their job and work it out? Would you? Would you put up with the stress and burden of managing 2.1 million employees for a lousy $3,489 bucks a month? The answer is a resounding NO! Nobody would. There is no incentive to work. So now, not only do all the “big wigs” at all of these thousands of major businesses quit, but it also leads to the company going under and all the millions of employees being out of a job as well. There are an estimated 18,469 large businesses (businesses employing over 500 people) in the United States as of 2008 (that is the latest census data). There are hundreds, if not thousands, of these companies that employee well above the 500 employee mark. The large businesses employed around 61.2 million people in 2008 (http://www.sba.gov/sites/default/files/sbfaq.pdf). So if half of these lost their jobs that means 30.6 million people would be out of a job overnight, and that is a generous number. This of course is all just speculative, because the numbers are from 2008, before the economic downturn. Nonetheless, it shows how catastrophic it would be if everyone received the same paycheck. This needs no more argument here, if more is desired to reach a full agreement with these statements all one needs to do is study the history of the USSR and why it failed. The bottom line is that if you cut salaries you cut the incentive to work, and all those making more than this will be discouraged in their jobs.

Investing would be hit very hard. The venture capitalist and the angel investor would have no money to invest in new businesses. This means that entrepreneurship would all but cease to exist. Where would people get the money to start a business if there were not banks or people to loan this money out? There would again be no incentive to start a new business. Maybe someone will say that if I work hard enough and I earn enough that I can raise the GDP high enough to make it worth it to work that hard. But the combined income of two the wealthiest people in the country Steve Jobs and Bill Gates would only add $2.49 per year to each paycheck, and imagine the long hours and years they had to put in to get their businesses to where they are today. It’s absurd to think that investing and entrepreneurship would still exist under a fixed income system. Who would work hard for years only to see his salary go up maybe a few cents over that time? Because people no longer have millions to lend out to others there would be no new investments and business creation would come to a standstill, causing another axe to be thrown at the economic tree.

The question of equal pay and startup companies has been lightly touched in the last paragraph, but a little more would be useful. Small firms accounted for 65 percent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009 (http://www.sba.gov/sites/default/files/sbfaq.pdf). That means that because there are no new firms, because there is no incentive and there is no money to finance them, millions of new jobs will never be created. This would not be a problem if everyone was going to live forever young and have no children; in that circumstance there would be no need to create new jobs, but that is not the world as it is. Some people may argue that to create your own business is to be independent and free. Free from what? You’re still only making as much as the next person and probably working just as hard. Free from stress? Of course you would be, you would be guaranteed a check every month, so why start a business in the first place?

What about the real estate market? The debt to income ratio helps us to understand the problem here. When making payments on a house it is recommended that you stay below 45% of your income for monthly payments. 45% of $41,877 is $18,844, or $1,570 per month to spend on a house. What about those who are paying mortgages on homes worth more than that? In the U.S. there are thousands. If anyone who is paying $1,570 or more per month on a house has a pay cut to $41,877 per year they can kiss their houses goodbye. They will not be able to afford it. This would devastate the banking industry just as it has done recently and it would also destroy the real estate market. What happens when the real estate market and banks fail has been shown to us in the last few years so I will not go on further here about that. However, think of this and the mass unemployment explained above. I wonder what we would do with all of those vacant houses…

A fundamental argument of socialism is that people are entitled to things such as the minimum standard of living and health care and a number of other items that are to be free to all those who want or need it. This is a fundamental flaw that this way of thinking has inherent in it. How can everyone be entitled to these things? For if everyone was entitled and everyone quit working there would be nobody to provide it for us. There is no such thing as a free lunch. In order to give this liberty to the people you must also enslave others to give it to them, because it doesn’t just appear out of thin air, someone must provide it, and who will that be? Nothing can be called a right if it has to be earned. That is one of the philosophical problems of socialist thinking, “here you deserve this, now go earn it!” How can we say that we should give everyone equal pay when many have not earned it. Being born does not mean you deserve anything but the right to breathe, the right of freedom of speech, freedom of thought and the right to pursue your own happiness.

So we can see in just these few paragraphs the disastrous effects of equal re-distribution of wealth and the havoc it would have on the American economy. We did not even mention that most of our economy is made up of service jobs and what it would do there. We did not discuss that we are a consumer based economy, what if nobody could afford to buy anything anymore? What would be the point of schools and education? What would be the point of anything if we were all meted the same reward for different exertions at work? What about free riders, those who sit back and let everyone else do the work? There are many questions and debates that go into this argument. This is the fundamental debate between capitalism and communism, or socialism. There have been volumes and libraries written to defend either side of the arguments we have covered in three pages. But these are the general ideas that follow these style of arguments. However, common sense and a little thinking can get you a long way in turning to the side of inequality and unequal pay and rewards.