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Liberal Democracy

Liberal Democracy
The Free State

Wednesday, October 27, 2010

Liberty Pen: Milton Friedman- Redistribution of Wealth


Source: Liberty Pen- Professor Milton Friedman-
Source: Liberty Pen: Milton Friedman- Redistribution of Wealth

The income gap in American society, or 
wealth disparity, is  a problem that slows the growth of GDP.  Consumers at the lower end of the economic scale are the principal drivers of the retail economy because they spend almost all of their income every month.  When they are not receiving an appropriate share of GDP, they reduce spending and drag down the whole economy.  People at the upper end of the economic scale store their surplus income in financial institutions, property investments, and luxury goods.  Such activities do not contribute significantly to the general economy.  

This problem will not be solved simply.  Aggressive government efforts to redistribute wealth (very high taxes on high earners) distort the natural operation of the economy by discouraging the creative energy that expands it. Generous payments to low earners create another distortion by signaling that acquiring the education and skills for success in life is not necessary because income support from the government will be unconditional.  The progressive nature of the current federal income tax provides some redistribution.  A substantial increase in this effect is probably unwise.

Attempts to solve this problem should focus on the creation of more wealth that benefits society as a whole.   Low and middle income people should be empowered to increase their income through education and training.  Government can also improve the  economic environment with trade agreements that are beneficial to the American labor market. These should provide that  American companies have the same access to foreign markets that foreign company's have here and that American companies pay no more in tariffs than foreign company's pay here.   Respect for and compliance with the rule of law should be required in any trade agreement.  

Taxes and regulations need to be monitored continuously so that their burden is no more than necessary for the desired result.  Through bureaucratic creep they can easily overwhelm employers, workers and consumers without any additional benefit.  Job outsourcing needs to be monitored so that laws and regulations don't encourage American companies to ship jobs oversees where slave labor, or slave wages, under unsafe working conditions, will be competing with American workers.

Elimination of the income gap in America is desirable.  Reduction of the gap, with benefit to the GDP, is both desirable and possible by increasing the productivity and earnings of the lower economic strata.  This will not be achieved through   forced redistribution of wealth but by creating an economic environment that stimulates wealth creation and benefits  society as a whole.