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.

Posted by Jim Newton on Jan 25 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.