James Piereson writes about the redistribution fallacy in Commentary:
The intellectual case for redistribution has been outlined in impressive detail in recent years by a phalanx of progressive economists, including Thomas Piketty, Joseph Stiglitz, and Paul Krugman, who have called for redistributive tax-and-spending policies to address the challenge of growing inequalities in income and wealth. Nobel Laureate Robert Solow, of MIT, put the matter bluntly last year in a debate with Harvard’s Gregory Mankiw, saying that he is in favor of dealing with inequality by “taking a dollar from a random rich person and giving it to a random poor person.”
Piereson focuses on the proven ineffectiveness of redistributive schemes, that they actually don’t work well at making the rich poorer and the poor richer. Hence the frustrated socialist’s suggestion to bypass the welfare bureaucracy and just “take ... from a random rich person,” as if the rich walked around with net worth signs like in those ING commercials. He salivates at the possibility of equality police relieving businessmen of surplus cash on their way into work and distributing it to street people, or some variation of that.
Never mind such “pragmatic” redistributive solutions would cause the wealthy to change their behavior to protect their wealth. If a redistributive system actually succeeded in transferring wealth from the rich to the poor, it would put the economy on ice, forbidding it to flex and grow, defunding innovation and value creation.
Socialist planners have this idea in their heads, planted there by John Maynard Keynes, that aggregate demand, measured as consumer spending, is the economy’s growth engine. The rich often live below their means and have a lot of disposable income that they either save or spend on frivolities. The planner thinks if he takes that money and gives it to the poor, they are more likely to spend it, whether on food, clothes, toys, whatever. Thus, because consumer spending has increased, because demand has increased, the economy grows.
They couldn’t be more wrong. When you take the rich’s savings and disposable income, you deplete the economy’s real growth engine, capital investments. The cutting-edge inventions of tomorrow are considered essential minimum standards of living 30 years from now. First the automobile, then the TV, then the computer, then the cell phone. They were considered novelties at first. Now you’d be hard-pressed to find a “poor” person with fewer than three of the four. All these innovations, in their nascent forms, lifted off the ground because the rich believed in the producers who made them and who secured their investment as start-up capital. These inventions have enriched the lives and productivity of billions of people. They would not have come into being if we had followed the planners’ advice and taken from the rich and given to the poor.
So it is today. We don’t know what the next great leap forward in supercomputing, telecommunications, or transportation will be. And we will never find out if we starve innovators of the start-up capital they need, invested in them by the rich with their “unnecessary” excess cash reserves. Such a scheme as the socialists propose guarantees a static economy, where progress is deliberately halted for the sake of equality and aggregate demand. In the long-run, taxing the rich to give to the poor hurts the poor, as they miss out on the wonders that capitalism creates and over time makes common to all.