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.

A Question of Candy

Imagine that you are a student in Ms. Applegate’s first grade classroom, along with 29 other kids. And Ms. Applegate tells you it’s the tradition at Adams Elementary for all the kids to bring in their Halloween treats to show off to the other kids on the first Monday after trick-or-treat. Because it turns out THERE’S A CONTEST between Ms. Applegate’s class and Mr. Bucktooth’s class, and whichever class collects the most candy WINS!

So the day after Halloween all the kids bring their candy to school. Fat Howie has 265 candies, and you know for a fact that he didn’t even go out trick-or-treating because he’s a lardass who spends all day watching TV. However, his father owns a candy store. And the Baker twins collected 320 pieces between them by working hard and double shifting. And so on down the line, everyone with more or less candy depending on how hard they worked, where they lived, and who their father is.

At the very bottom of the list are three kids with zero pieces of candy on their desks. When Ms. Applegate asks them why they didn’t bring any candy, one kid says he forgot, another says he had to work in his father’s tienda that night, and another kid says he don’t need no stinking Halloween. 

To remedy this inequity, Ms. Applegate says she has a Wonderful Idea! We’re going to put all the candy in one big pile, and then we’re going to Divide It Up Equally! Everyone in favor of that great idea raise their hands!  And almost every kid in the classroom raises their hand, including you, even though you calculate that you’ll leave the class with fewer candies than you came with. But it’s all worth it because IT’S FAIR!

Now here’s the question: next year, will Ms. Applegate’s 2^ndgraders bring in more candy or less candy than they did this year? Is there any way to know for sure? Does human nature make any difference in carrying out Wonderful Ideas?

Discuss.

An Imaginary Walkabout for Progressives

I know you hate math, and budgets, and anything to do with money. But humor me, and pretend for a moment that you’re a FINANCIAL ADVISER and I come to you with the following problem:

ME: Hi. My name is Sam and I need some financial advice.

YOU:  Hey there Sam. Tell me what seems to be the problem.

ME: People tell me I’m spending too much money. I don’t really believe them and I know that I’m spending it on good things, but I said I’d seek out some independent advice and here I am.

YOU:  What sort of business are you in, Sam?

ME: Mainly charity. I give things away to people who need it. Old people, sick people, kids. So it’s not really a business per se.

YOU:  I can see how it might not generate a lot of income. So tell me. Where does your income come from?

ME: I have a bunch of nephews. Some of them are rich. Filthy rich.

YOU:  And these nephews give you money?

ME: You got it. Well, about half of them do.

YOU:  So. Let’s talk numbers.

ME: Must we? I hate all that abstract stuff. I don’t see why you can’t just say that what I’m doing with the money is good and noble and forget about the old balance sheet for once.

YOU:  I’m sure what you’re doing is good and noble. But financial advice is all about balance sheets. Your income minus your expenses. That kind of thing. Let’s start with last year. What was your income?

ME: $23,000.

YOU:  And your expenses.

ME: $36,000.

YOU:  So you spent $13,000 more than you took in.

ME: If you say so.

YOU:  And where did you get the $13,000 to continue your charitable work?

ME: I borrowed it.

YOU:  Ah. So you’re $13,000 in debt.

ME: I have the figures in this file somewhere. Umm, let’s see. Here it is. Yep, $13,000 from last year.

YOU:  Sounds like there may have been some borrowing before last year.

ME: Oh yeah.

YOU:  How much?

ME: Here it is. $160,000.

YOU:  Wait a minute. You owe $160,000?

ME: I guess. Whatever you say. Like I mentioned before, I’m not all that cozy with numbers.

YOU:  Well, Sam. I don’t want to alarm you. But I’m not sure I understand how you can ever pay back the $13,000 you borrowed last year much less the 160 grand you already owe without a significant – and I do mean significant – increase in your revenues or cuts in your spending.

ME: That’s why I’m here, babe. You’re the expert. But let’s not talk about cutting my spending. I can’t do that. I’ve promised people a lot of nice things and I don’t intend to disappoint them.

YOU:  But –

ME: Let’s talk revenue. I keep thinking the way to go is squeeze those rich nephews of mine a little tighter. Right now they only give me about a third of what they rake in. I pushed them up to 40% last year but it didn’t produce the revenue stream I’d hoped for. In fact, let's see... it brought in $800 extra dollars.

YOU:  Hmmm. That would still leave you $12,200 short.  For last year alone.

ME: Tell me about it. But here’s the thing: those suckers couldn't have made it without my help, so how about a little payback? You’d think they’d be grateful but one of them moved to the Caymans without giving me a dime. I’m thinking I should just put a gun to their heads and take it all before the rest of them skedaddle.

YOU:  And how much would that be in dollars? If you took it all.

ME: About thirteen grand. It’s perfect. I take their dough and pay off last year’s debt. Problem solved.

YOU:  For last year’s debt, maybe. But what about next year? 

ME: What about it?

YOU:  Well, do you think they’ll be likely to work next year if you took all their money this year? I’m thinking it might be a disincentive of sorts. Being selfish, they’ll either stop working or move to the Caymans. And there’s still the matter of the $160,000 you owe. How are you going to pay that off – especially after you run out of nephews.

ME: You tell me. That’s what I’m here for.

YOU:  It can’t be done. 

ME:  Darn.

YOU:  You don’t seem too worried.

ME: I’m not. I forgot to mention one little thing.

YOU:  What’s that?

ME: I have a money printing press in my basement.


NOTE: all the figures used here are proportional to the real revenue & expense of Uncle Sam and all his "rich" contributors, minus a bunch of zeroes. Thus, our $16 trillion in debt becomes $160,000, our revenue of $2.3 trillion becomes $23,000, etc. Now look at those figures and tell me there's another way out besides the printing press.