Redistribution is a poor prescription

Published on Wednesday, 5 March 2014 22:45 - Written by

A misdiagnosis can often be deadly — it’s the start of a course of treatment that’s wrong for the ailment. That’s true of economics, as well as medicine.

So when Ryan Cooper of The Week magazine writes a prescription calling for massive redistribution of wealth in America (through more than just income taxes), his mistake is larger than just the treatment. It’s his diagnosis.

“Why the Fed should hand out wads of cash to everyone,” his article is titled.

“The case is pretty easy to summarize,” he writes. “Most of the economy is consumer spending, so with median incomes flat, the only way to keep economic growth going is by increasing household debt. But that’s unsustainable, since you eventually reach a point when everyone realizes that they can’t take on anymore debt. Consumers then pull back their spending and aggregate demand collapses, causing a recession that is hard to recover from because consumers are buried under big debt overhangs. You can’t spend if you don’t have a job and are underwater on your mortgage.”

That’s absolutely true. That’s the reality of what we’re facing in this sluggish “recovery” that isn’t producing jobs or higher wages.

But as far as a diagnosis goes, Cooper hasn’t found the disease. He’s merely noted the symptoms. But from those symptoms, he goes on to prescribe a cure.

“The solution is obviously redistribution (I’m using the term here in a general sense),” he writes. “Personally, I favor granting the Federal Reserve the power to give new money to every citizen on an as-needed basis.”

This course of treatment would kill the patient, because it misses the diagnosis. Let’s go back to what should be the start of any public policy debate: definitions.

Definitions matter because they direct the debate.

What is poverty? It’s certainly not merely the condition of having no money. “Broke” and “poor” aren’t the same thing. A full-time college student appears, on paper, to be poor. And he may even feel that way as he heats his ramen noodles. But his situation is fundamentally different from that of, say, a single mother with severely limited job skills, no car, and unreliable child care.

It’s more true to say that poverty is a lack of access to resources. Measures such as income and expenses are helpful, but they don’t present the full picture. A far better definition of poverty is offered by Steve Corbett and Brian Fikkert, in their book “When Helping Hurts.”

“While poor people mention having a lack of material things, they tend to describe their condition in far more psychological and social terms...” the authors explain. “Poor people typically talk in terms of shame, inferiority, powerlessness, humiliation, fear, hopelessness, depression, social isolation and voicelessness. Low-income people daily face a struggle to survive that creates feelings of helplessness, anxiety, suffocation and separation that are simply unparalleled in the lives of the rest of humanity.”

That’s what makes the war on poverty so difficult to wage.

If it really was just about income, redistribution of wealth could fix everything.