Month: June 2007

I’ve been thinking about the whole distribution of wealth thing and I begin to wonder if it is really a problem. What happens when Alex Rodriguez gets paid $25 million dollars a year? (I pick him because I know his salary)

I have heard arguments that if we tax the rich too heavily they will not be motivated to compete – in my mind, there’s no difference between $25 million and $20 million a year – both are more than I can spend so why would I work harder to earn more money if I am already drowning in the stuff. Then I realized something – these guys probably learn really fast how to spend more money than I can imagine because they have it. If I’m making $2 million a month but I have managed to acquire $1.8 million a month in expenses and I can see another $400,000 a month that I could spend my money on, then I am going to be motivated to try to earn $2.2 million a month.

What I realized is that the very wealthy are spending large amounts of money and that money provides work for the rest of us. If someone buys a mink coat for $100,000 dollars I might say that no coat is worth that price, but where does that money go? It does not go into the fur – it goes into the economy. It arrives in the accounts of the store that sold the coat, but then it is used to pay bills, sales commissions, coat makers, mink farmers, mink food producers, etc. Someone will complain, “but they don’t spend all of it, some of that money goes to corporate profits.” Corporate profits are used to produce more goods, pay investors, or expand businesses. For those who want to argue that “investors” tend to be the already wealthy I reply that they are busy spending their money one way or the other. Those people who would hoard their wealth eventually die and pass it on. Somewhere down the line it will still get spent – and there’s no need to worry about the detrimental effect of hoarding – even if Bill Gates were to sit on all his Billions (as if most of his money were not already tied up in charitable causes) it would hardly even register on our national economy.

When someone argues that there is a problem with some people having more wealth than others they do so with an assumption that there is a limit to how much wealth is available. Even if that were true (and I’m not sure it is) that is only a problem if there is not enough wealth to provide for everyone. We all know very well that there is plenty of wealth available to meet the basic needs of our entire society with much to spare.

Wealth is not about cash, it is about cash flow – to be wealthy all you really need to do is flow less cash out than in. Because of the flowing nature of wealth we need not worry that someone else has it, all we have to do is find a way to the waters edge by producing something that others find valuable enough that they flow cash through us. In fact, the worst thing that could happen economically is to set up a system which gives some people incentive to not produce anything.