Thought Experiment #1

Imagine that you brought all the millionaires in America out to some fantastic outdoor location for a weekend. And imagine that you fed them a generosity drug, and that by Sunday every single millionaire had signed over to you every single dollar they owned – roughly $25 trillion – and then went away whistling and happy and broke. (The only thing they get to keep is their homes, cars, yachts, jets, etc)  You now have $25 trillion – about a third of all the wealth in America.

And you've decided to give all that money to the poor. Because, you know, fairness.

Now – figuring that the poor would rather get a check than a dry cleaning establishment in Toledo – how to convert that $25 trillion into cash? One of the things you haven’t really had time to delve into is economics. To the extent you’ve given it any thought at all, you kind of figured that the rich kept all their money in vaults full of $100 bills. The news that it is messily tied up in various businesses, stocks, bonds, and real estate is depressing. And when your accountants mention something about a “BUYER’S MARKET” at a time when you have to SELL everything, and that this will shrink your $25 trillion stash down to somewhere in the neighborhood of  $15 trillion, you begin to understand why Hayek said, “"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."  

But let’s pretend that you can actually sell $25 trillion worth of stuff and walk away from the table with $25 trillion. Cool. Now all you have to do is figure out exactly who the poor are who will get all this money. You know, names and addresses and suchlike. And how about the amount on the check? Do you want to give the poorest the most, or everybody the same amount? Do you include illegal aliens? Felons? Should blacks get more than whites? Should whites get anything at all? What about Native Americans? These seem like fair questions and you want to be fair above all else. So you put a bunch of experts in a room and you ask them to come up with a plan that will be fair and balanced and do the most good for the most people, while you have a martini. You can afford it. After all, you’re a trillionaire.

And either the experts come up with something or they don’t. (Hayak would say it is impossible for them to come up with something that works.)  But let’s say they come up with something, and let’s pretend it will work. In some way or other, your plan will divide $25 trillion by some number of poor people. How many and who are troublesome details, but let’s say you decide to give everyone who makes under $40,000 a year an equal share. You figure out that there are 25 million American adults who fall into that income range. Divide your $25 trillion stash by 25 million poor Americans, and each of them gets $1 million! 

So, on a Wednesday morning, 25 million poor Americans wake up and find a check for a million bucks in their mailbox or slipped under their door. Talk about equality and fairness! Talk about stimulus! 

So let’s imagine what’s likely to happen under the BEST of circumstances. Well, in the real world, there might be some carping from some of these new millionaires when they realize the feds have a claim on about 40% of their million, leaving them with a mere $600,000. And there might be a little envy and some hurt feelings from the father and mother of five who both work hard at menial jobs, earned $41,000, and now watch their neighbors in the crackhouse across the street buying BMW’s and flatscreen TVs. But let’s pretend they just bite their tongues and go on working without causing a fuss. What will be the impact on the rest of us?

The good news: there will be a boom in certain parts of the economy. The luxury car and home market will explode. So will high end clothing and jewelry, yachts, private jets – there’s a whole new set of millionaires to satisfy. The bad news: most of the rest of us would lose our jobs because the rich people who were paying us are now poor and can't afford us any more.       

Now let’s close our eyes and imagine that five years have passed. Imagine what the lives of those new millionaires have now become. How many of them will have used that original stake and parlayed it into more millions by opening a dry cleaning store or a pizza shop or any other legitimate business? How many will have used it to get their kids into a school where they might actually learn something? How many of them will still be millionaires?

Certainly a few of this new crop of millionaires will use their money to improve their lives by investing rather than spending. But how many? 5%? 10%? We can’t know the answer, but a look at what happens to people who win million dollar lotteries isn’t encouraging (over 50% end up broke within five years), nor is the example of professional athletes who actually EARNED their millions (60% of NBA players and nearly 80% of NFL players file for bankruptcy within five years of their retirement).

Now ask yourselves: in that same five years since they were impoverished, how many FORMER millionaires (the ones who took the generosity drug and gave all their money to you) have become millionaires again?

Contrast and Compare: Which group -- FORMER or NEWLY CREATED MILLIONAIRES -- will have the most millionaires five years down the road?

Does your answer suggest any larger point?

Discuss.