The debilitating nature of economic envy
In the midst of the current Republican presidential nomination process (and no doubt later in the general election) much attention has been (and will be) given to the topic of the inequality of income and/or wealth. Some people firmly believe that it is in the best interests of a nation, and its competitive standing in the world, that markets be permitted to determine the optimum allocation of resources, which by its very nature is likely to mean an inequitable distribution of income/wealth. After all, people have different levels of education and experience in various fields of endeavor, which suggests the marketplace will provide some people an enhanced return (wages, profits, etc.) depending upon how those aptitudes are valued within a free market. For those holding this theoretical perspective, the proper role of government is to ensure an equal access to opportunity, but certainly not to actively promote an equality of outcomes (such as income generation).
On the other hand, there are those whose convictions are just as firmly held that such inequality of economic outcomes within any society is fundamentally unfair and can only be properly balanced through an active involvement by government. This may come in the form of mandated outcomes such as guaranteed wage levels (minimum wage), or the cause may be advanced by utilizing government to redistribute income/wealth via government taxation and spending decisions. This belief system was vividly championed this past year by the Occupy Wall Street movement, which meant to shift something (though there was no apparent unanimity as to what that “something” should be) from the 1 percent to the 99 percent.
The stark contrast between these two beliefs was recently provided by an article in the Wall Street Journal titled “Sarkozy Opponent Calls Finance Sector his ‘Foe’.” Obviously, the article did not deal with economics/politics in the U.S., but rather were centered on elections to be held shortly in France. The primary opponent of French President Nicolas Sarkozy will be Socialist Party candidate Francois Hollande.
Mr. Sarkozy’s opponent stated the differences between these two belief systems in a remarkably straightforward and understandable way when … “Mr. Hollande said on Sunday that some of his first actions, were he to win the presidential election, would be to shackle the world of finance — which he described as his ‘main foe’ — and raise taxes on the rich … ‘Each country has a soul … and France’s soul is equality.’”
Needless to say his opponent, current French President Sarkozy, indicates that such an assault on free market principles would be disastrous for the economy and the well-being of French citizens.
Whatever one’s belief system, it must be recognized that such mandated outcomes — targeting the financial sector and “the rich” — will bring about inevitable changes within the economy. To target the financial sector and inhibit market decisions will mean a more restricted access to world financial capital. Over time (perhaps very quickly), funds will flow out of the French financial sector and cause the supply of loanable funds to plunge. The likely market outcome? Higher interest rates, fewer loans to people and businesses, and a reduction in economic activity at a time when the euro-zone (including France) is already struggling with recessionary forces.
And what about taxing “the rich” more heavily? This one is a little more uncertain, but given that money is highly fluid, “the rich” may simply move their income/wealth generating capabilities elsewhere — in part because the French economy may be in recession, as discussed above — and thereby avoid higher rates of taxation. Or perhaps “the rich” will simply cease working so hard since their personal return is more limited. After all, while government officials can shake down “the rich” for a larger share of what they earn, even bureaucrats and politicians haven’t yet gone so far as to shackle “the rich” to their workplaces and force them to generate an income which government will then tax more vigorously.
While it is always highly uncertain precisely how anything or anyone will respond when placed under conditions of duress by government — in this case the financial sector or “the rich” — the one thing that does seem remarkably clear is that the government will likely face unwanted changes. And it makes no difference whether such government actions are undertaken in France or here in the U.S.; the seemingly inevitable consequences of actions taken due to economic envy will be self-defeating for the larger society, as intelligent people/businesses react to restrictions placed on their economic freedoms.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.