Saturday, January 12, 2013

Obama's Zero-Sum Game and the Coming Redistribution Bubble

January 12, 2013
By Michael Bargo Jr.

 As a presidential candidate in 2008, Barack Obama stated to Joe the plumber that the primary goal of government should be income redistribution.  And in reality, Obama has made great strides with regard to income redistribution, having enlarged the food stamp recipient list, for example.

At the heart of income redistribution rhetoric is a principle called the "zero-sum" theory.   This theory assumes that the amount of money in the economy is fixed, and therefore, a wealthy person gains wealth only if another person loses it.  The amounts are equal, thus the total is a "zero sum."  It is only by exploiting the working class, Obama believes, that the rich have unfairly become rich.  The role of government, then, is to achieve a more "just" and "fair" distribution of wealth -- a "re-distribution" of the fixed amount of wealth in the economy.

Since rich individuals will not part with their money voluntarily, the federal government, through its taxing authority, is the only institution equipped to achieve this goal.  The zero-sum perspective then mandates that only the federal government, through taxation, can produce the desired zero-sum equality by applying standards of fairness.  So those running for national office are most likely to place income redistribution in their platform.

The idea that the wealthiest individuals should pay their "fair share" has been repeatedly stated by the president -- not just during campaigns, but all during his first term.  But a review of the president's actions, however, shows that the zero-sum theory cannot accurately describe what he has done.

The zero-sum perspective implies that a balance will result if the money is taken from the rich and given to the poor.  The bottom-line number of the federal budget  sheet, then, should be a zero: as the rich pay more in taxes, the poor will receive more money through federal programs.  This would follow from a literal interpretation of the zero-sum theory.

The zero-sum perspective also suggests a spending ceiling -- a "limit" as to how much tax money can be spent on redistribution.  This has an interesting implication: the zero-sum goal can then be used to force a balanced budget.  The President can say that to achieve equality, we need to redistribute just enough income to achieve equilibrium; we can't spend more on people programs than we collect by taxing the rich.  But the zero-sum redistribution rhetoric has never been used in this way.  It is never used to constrain federal spending -- only expand it.  President Obama's policies of federal spending, however, have resulted not in a zero-sum, but rather in the most lopsided negative balance in history.  This proves that he has no interest in achieving zero-sum equality.

Obama has used redistribution rhetoric to spend so much money that a deficit of over 5 trillion dollars has been created in just his first term.  What does Obama expect will happen when this debt needs to be paid?  If all of the Obama debt is paid by only the rich, then the zero-sum solution would predict that less money is then available to redistribute to the poor.  If Obama expects all taxpayers, both rich and poor, to pay this debt, everyone will be left with less disposable income.  Through time, then, more income taxes will be used to service the debt payment, not to support income redistribution.  The president and his army of academic supporters refuse to address this issue.

This scheme of paying out money today that will be replenished by future contributors is usually called a Ponzi scheme.  While private-sector Ponzi schemes are illegal, public-sector schemes are not.  One can ask if the zero-sum theory creates a federal Ponzi scheme of spending and taxation.

Since President Obama has chosen to ignore the constraints that exist in the zero-sum framework, one can ask what value he sees in it as the guiding policy of his administration.  The answer is simple: since FDR, Democrats have exploited the emotions of the electorate with regard to money.  There is a natural envy among the poor toward the wealthy; they do not want to respect the achievements of the wealthy as being a result of hard work, intelligence, and motivation.  The only wealthy persons the poor respect are those in sports, music, or motion pictures.

It is all too easy for politicians to exploit the resentment hardworking taxpayers may feel toward the rich.  In fact, politicians have worked very hard to encourage this resentment, harvesting it to create widespread support for public spending programs.   Democrats do not conceive of the zero-sum framework as one that contains restraints.  Rather, they use the political support they obtain from it to create budget deficits.

The zero-sum rhetoric has enabled President Obama to create what can be called a redistribution bubble.  Not all of his spending goes toward income redistribution, but he carefully refuses to categorize his spending.  He will not say, for example, that "this amount" is going to repay campaign contributors and "these amounts" to crony capitalism, income redistribution, etc.  His out-of-control spending has created such big deficits that the American economy will continue to slow down, spawn few new jobs, and usher in a lower standard of living for average working Americans.  One aspect of this bubble is the increased service of the national debt, which will result when interest rates return to their historical average of 5.4%.  At that point, the payment on the debt will increase from the $360 billion it is today to one trillion dollars.  This loss of funds will mean less for redistribution goals.

By printing too much money, Obama will create inflation.  Inflation will cause the value of everyone's dollars to decline, resulting in an effective pay cut for all.  The only tool the Federal Reserve has to control inflation is to raise interest rates; these higher rates will themselves cause prices to increase and put great pressure on the federal budget to cut spending in many programs.  Inflation is also a tax on the poor.  So paradoxically, income redistribution policy creates a tax on all working people and will force cuts in people programs.  

The zero-sum concept has macroeconomic consequences.  Once the bubble breaks, these consequences will be all too real for working Americans, and by then little will be able to be done to ameliorate their effects. 

Obama's greatest achievement may turn out to be that he proves, once and for all, that income redistribution has the tendency to hurt the very people it purports to help.  This is true of not just President Obama, but other Democrats as well: their unwillingness to exercise spending constraint is caused by their refusal to see the zero-sum theory as mandating constraint.

Since most economists know this, and Obama and his advisers should reasonably know this, their use of income redistribution rhetoric to grow government and overspend proves that they are willing to create financial hardship for working people in order to win elections and maintain political power.  In effect, Democrats are using redistribution rhetoric to exploit the working class -- the very thing they accuse the rich of doing, and the very thing they say can be cured only with the use of zero-sum taxation guidelines.

American Thinker