Benign Versus Malignant Inequality

Stealing From the Poor

Rich people steal from poor people.  No, it's not that rich people creep up behind poor people and snatch their handbags.  It's rather that the supply of "wealth" is finite, and when rich people have too much of it, they prevent poor people from getting more wealth.  Therefore, rich people indirectly steal from poor people.  The solution is readily to hand.  Confiscate the wealth of rich people, and redistribute it (after Government costs and expenses) to poor people.

So runs the received wisdom of the Commentariat and chattering classes.  If only things were so simple.  A recent article in the Washington Post documents research published in the Journal of Comparative Economics.  Some argue that the uber-wealthy actually end up benefiting all of society; others run the "rich people steal from poor people line."

You might be used to hearing criticisms of inequality, but economists actually debate this point. Some argue that inequality can propel growth: They say that since the rich are able to save the most, they can actually afford to finance more business activity, or that the kinds of taxes and redistributive programs that are typically used to spread out wealth are inefficient.

Other economists argue that inequality is a drag on growth. They say it prevents the poor from acquiring the collateral necessary to take out loans to start businesses, or get the education and training necessary for a dynamic economy. Others say inequality leads to political instability that can be economically damaging.

The new research, however, argues that how the poor became rich makes a significant difference.According to Bagchi, one takeaway of the research is that developing countries should limit how much businesses have to interact with the state to get things done — those interactions rarely turn out well for average people. The other lesson is that it's not just inequality, but the source of inequality that really matters.
In summary:

Specifically, when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy, the study finds. But when billionaires get their wealth through the market — through business activities that are not related to the government — it does not.

In the early stages of the research, it appeared that the existence of uber-wealth in a society coincided with  widening inequality--the poor getting poorer (comparatively) and the rich getting comparatively richer.  The implication, if the study had stopped there, was that it was indeed true that rich people "steal" from poor people.  But then the researchers dug a little bit deeper.

The most fascinating finding came from the next step in their research, when they looked at the connection between wealth, growth and political connections.  The researchers argue that past studies have looked at the level of inequality in a country, but not why inequality occurs — whether it's a product of structural inequality, like political power or racism, or simply a product of some people or companies faring better than others in the market. For example, Indonesia and the United Kingdom actually score similarly on a common measure of inequality called the Gini coefficient, say the authors. Yet clearly the political and business environments in those countries are very different.

So Bagchi and Svejnar carefully went through the lists of all the Forbes billionaires, and divided them into those who had acquired their wealth due to political connections, and those who had not. This is kind of a slippery slope — almost all billionaires have probably benefited from government connections at one time or another. But the researchers used a very conservative standard for classifying people as politically connected, only assigning billionaires to this group when it was clear that their wealth was a product of government connections. Just benefiting from a government that was pro-business, like those in Singapore and Hong Kong, wasn’t enough. Rather, the researchers were looking for a situation like Indonesia under Suharto, where political connections were usually needed to secure import licenses, or Russia in the mid-1990s, when some state employees made fortunes overnight as the state privatized assets.

Politically connected uber-wealthy do indeed use their influence to game the system to their own advantage.  They construct protective motes to shut out competitors and sustain higher prices over time.  In other words, they rip consumers off, deploying corrupt influence peddling to protect and enrich their positions.  In such cases the uber-rich are becoming more wealthy, genuinely at the expense of the poor.

Looking at all the data, the researchers found that Russia, Argentina, Colombia, Malaysia, India, Australia, Indonesia, Thailand, South Korea and Italy had relatively more politically connected wealth. Hong Kong, the Netherlands, Singapore, Sweden, Switzerland and the U.K. all had zero politically connected billionaires. The U.S. also had very low levels of politically connected wealth inequality, falling just outside the top 10 at number 11.

When the researchers compared these figures to economic growth, the findings were clear: These politically connected billionaires weighed on economic growth. In fact, wealth inequality that came from political connections was responsible for nearly all the negative effect on economic growth that the researchers had observed from wealth inequality overall. Wealth inequality that wasn't due to political connections, income inequality and poverty all had little effect on growth.

“The negative effects of wealth inequality are largely being driven by politically connected wealth inequality. That seems to be the primary channel that drives this relationship,” Bagchi said in an interview.

This exposes a cruel irony to which most of the egalitarians of our day are blind.  The egalitarians want more State rules, regulations, and controls over the economy to prevent the uber-wealthy emerging.  Yet a more intrusive State regulatory regime provides the most fertile conditions for the wealthy to forge political connections to advantage their personal interests.  Politicians always want money--for funding their re-election campaigns if nothing else--let alone building up a post-political nest-egg for their families.  Crony capitalism, where the rich buy business favours from politicians, is far more likely, the more intrusive and regulating the State becomes.

Why is politically connected wealth inequality so bad for a country? The researchers suggest that when wealth and power becomes concentrated in the hands of a few, those business and political elites often influence government policy in a way that hurts the broader interest.

For example, politically connected business elites can charge consumers higher prices for services, control access to bank loans and other funding, and prevent outsiders from starting competing businesses. “One of the things that shocked us is that once the billionaires had a significant amount of wealth, they would often take steps to try to limit the amount of competition,” Bagchi said.  For example, politically connected business elites can charge consumers higher prices for services, control access to bank loans and other funding, and prevent outsiders from starting competing businesses. “One of the things that shocked us is that once the billionaires had a significant amount of wealth, they would often take steps to try to limit the amount of competition,” Bagchi said.

The conclusion of the authors?

According to Bagchi, one takeaway of the research is that developing countries should limit how much businesses have to interact with the state to get things done — those interactions rarely turn out well for average people. The other lesson is that it's not just inequality, but the source of inequality that really matters.

Thankfully, we believe that in New Zealand crony capitalism and its inevitable corrupting influence is generally suppressed and controlled.  Mind you, that is not due to New Zealand not having an intrusive, regulating, controlling State.  Rather it is that the country is so small, political cronyism and favouring the wealthy few soon becomes known.  Public opprobrium is both swift and deadly.   Sunlight is always be best disinfectant.

But the United States is another story.  One just has to consider how many Congressmen and Senators get elected whilst having low or average net-worth, only to see them leave decades later multi-millionaires.  The implication is that Washington is a fetid swamp, and that crony capitalism is alive and well.   When this is the case, it is much more likely that the rich are indeed stealing from the poor and that the State is their facilitator.