June 18, 2020
The Problem With Shrinking Pies
The Problem With Shrinking Pies

The Problem With Shrinking Pies

In a July 6, 2012 article from Investors.com entitled, Disability climbs faster than jobs under Obama, author John Merline notes:

“The economy created just 80,000 jobs in June, the Bureau of Labor Statistics reported Friday. But that same month, 85,000 workers left the workforce entirely to enroll in the Social Security Disability Insurance program, according to the Social Security Administration.

The disability ranks have outpaced job growth throughout President Obama’s recovery. While the economy has created 2.6 million jobs since June 2009, fully 3.1 million workers signed up for disability benefits.”

This is the ultimate significance of any reduction in the Labor Force Participation Rate – whatever its cause: a shrinking labor force shrinks the size of the economic pie from which we all partake.

When the economic pie is NOT growing or even worse, when it is shrinking, those who receive more for whatever reason, i.e., a bigger slice of the economic pie, others will receive less; i.e., an absolutely smaller slice of the pie, not just a relatively smaller piece. 

This is the real meaning of the terms income redistribution.

Only if the economic pie grows and becomes larger, can we lessen this conflict. With or without the rhetoric of redistribution, the conflict will occur. Look at Greece and other European nations when they attempt to address the problems of income and wealth redistribution. Do not take the lesson lightly. For most of us, our roots are at least partly European; just the same, Africa, Asia, and South America, are not experiencing domestic tranquility, either. Perhaps the penguins of Antarctica are the exceptions!

There are several reasons for income inequality. Some are justifiable and necessary in coping with scarcity. Others are not and on a per capita or average basis, cause more scarcity rather than less. Households (human beings) that supply more productive resources, including more hours per work year (sacrificing more leisure) or are more productive due to the sacrifice of embodying in themselves more human capital and supplying more of other types of productive resources such as debt and equity capital (savings), to the transformation process called production, earn and deserve more income as a result. Households (human beings) that defer more consumption, i.e. save and take greater risks as they invest, earn more and in the context of commutative justice, deserve more. And so it goes for all productive resources. Equity is not equality!

However, when productive resources are emplolyed by firms that have market or monopoly power, they can earn incomes that are excessive or inequitable.  As Shakespeare said, “Ay, there’s the rub.”

This market or monopoly power means the firms or groups of productive resources such as labor unions, by reducing supply, can earn more than what is equitable. Ill-conceived laws, or inept enforcement of even good laws that regulate the degree of competition in the product and productive resource markets, result in an INEQUITABLE income distribution. It is more unequal than is needed and destroys EFFICIENCY as well; such market or monopoly power also tends to cause higher unemployment rates than would otherwise occur and tends to also to introduce into the economy, an inflationary bias bringing us periods such as occurred in the late 1970s.

If income redistribution is solely to reduce this excessive inequality arising from the exercise of market or monopoly power that results in inequities and inefficiencies, it is not due to capitalism but to the refusal to pass legislation to assure significant competition and/or to the inept, even if not corrupt, anti-trust authorities, legislatively mandated and well compensated to enforce the many laws on the books.

Referring to the timeless, Adam Smith: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

It is predictable, indeed the evidence is already beginning to appear, that redistribution schemes that fail to distinguish between EQUITY and EQUALITY will initiate economic meltdowns.  We must promote competition to prevent excessive inequalities and inequity in the distribution of income from happening in the first place and the need for redistribution will diminish significantly.

Before you act rashly and assume your lunch will be paid for by others, remember that when the problems mount from ill-conceived redistribution schemes, some will have to be thrown under the bus. A word to the wise should be sufficient. It is always easier to lock the barn door so the horse does not run away than to give chase to the horse pursuing its self interest. “An ounce of prevention is worth a pound of cure.”

For your recollection here are some pearls of wisdom spoken by those of the past:

1. We are ignorant of history or we ignore the lessons of history and as George Santayana warned us: “Those who cannot remember the past are condemned to repeat it.”

2.  Recall the words of Alexis de Tocqueville: “The American Republic will endure until the day Congress discovers it can bribe the public with the public’s money.”

3.  Reconsider the words of Margaret Thatcher: “The problem with socialism is that eventually you run out of other people’s money.”

Or is political chaos inevitable when elected representatives are so generously compensated and desire to be elected for life and political campaigns cost in the billions of dollars?

4.  “And remember, where you have a concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that. All power corrupts; absolute power corrupts absolutely.” Lord Acton (John Emerich Edward Dalberg-Acton)

Perhaps it is all of the above.

Please God, bless America.

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Written by
Donald Byrne