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Redistribution doesn’t reduce wealth inequality

Governments need to address the mechanisms by which people actually get rich.

Economics has trouble predicting the effects of big changes. Most of the events economists can observe and study are limited, incremental changes — a modest increase in the minimum wage, or a small decrease in immigration. This is as it should be, because governments are (rightfully) cautious about undertaking huge economic experiments. But when people are contemplating truly transformative changes — reparations for the descendants of slaves, for example, or wealth taxation — economists have fewer recent examples to look at. That’s one reason economic history is important — by looking at times of great upheaval, economic historians can shed light on the likely consequences of dramatic policy changes in the present day.

One such enlightening study is a recent paper by economists Philipp Ager, Leah Platt Boustan and Katherine Eriksson, entitled “The Intergenerational Effects of a Large Wealth Shock: White Southerners After the Civil War.” Using detailed Census records, Ager et al. measure the effect of the war on the wealth of slaveholders and their sons. This is an interesting question, because it asks: When the government takes away some of your wealth, how quickly can you bounce back?

The answer: Very.

Ager et al. used a combination of surnames, position in the wealth distribution and the amount of wealth held in “personal property” (which included slaves before the Civil War) to identify likely slaveholders among Southern families. Using these measures, they found that the Civil War and the abolition of slavery reduced slaveholders’ wealth by about 15% relative to Southerners who had had similar amounts of wealth before the war. This makes sense: When slaves were freed that represented a direct loss of wealth for slave holders, and their inability to compel former slaves to work their land reduced the value of that land as well.

But when they matched fathers to sons — estimating the sons’ wealth by their occupations and locations — they found that the sons of likely slaveholders closed the gap, rebounding to an approximately equal level of wealth relative to their Southern peers by 1880, and outstripping them by 1900. Although the South as a whole fell behind the North in wealth after the war, due to the accelerating importance of manufacturing and to temporarily reduced agricultural productivity, the relative wealth changes resulting from emancipation were temporary.

One reason for this might be that after the failure of Reconstruction to leave deep lasting changes on Southern society, the South implemented a system of sharecropping that was often only slightly better than slavery for black farm workers. To test this possibility, Ager et al. looked specifically at areas where land was redistributed or infrastructure destroyed by General William T. Sherman. Wealthy slaveholding families in these areas lost even more than Southerners elsewhere, often by large margins, due to the seizure or devaluation of their land. But again, within one generation, their sons tended to bounce back and equal or surpass those who escaped the devastation.

How did the sons bounce back? One way was by marrying into wealthy families, which they tended to do. The authors see this as evidence that former slaveowners retained social status and connections that gave them advantages in postbellum Southern society. Those connections could have allowed them to get good jobs or raise money to start businesses.

Whether that explanation is right, the finding that families bounced back from having their wealth expropriated has important implications for modern-day wealth inequality. Suppose the US government were to enact a big one-time redistribution of wealth, for example to pay for reparations for African-Americans. If the history of the postbellum South is any guide, the descendants of the rich people who took the hit would make up the difference before too long, thanks to the survival of the human networks that determine who has the opportunity to get rich. Even an annual wealth tax would likely have only a limited effect in flattening the distribution.

Right now, many economists and policy makers are looking for a way to reduce wealth inequality:

But Ager et al.’s research suggests that in order to make the US wealth distribution more equal in a meaningful and lasting way, the government will have to do more than simply reallocate resources. It will have to address the mechanisms by which people actually get rich. And if Ager et al. are correct, social ties and human networks are an incredibly important mechanism. Although racial segregation has fallen since 1970, black and white Americans still tend to live in different neighbourhoods and attend different schools. And poor Americans are at a big disadvantage when it comes to college:

When it comes time to get a good job or start a business, the children of well-off Americans know who to call, while the children of poor Americans do not.

Thus, evening out the wealth distribution will require more than just transfers. It will require getting more poor and minority kids into good colleges, enforcing the Fair Housing Act to help neighbourhoods desegregate faster, and other measures to help the children of the rich form strong social bonds with the children of the poor. Unless the basic shape of society is changed, the US can probably expect wealth redistribution to produce the same fleeting results found in the history books. 

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Work hard and you earn a salary, start a business and you have a shot at becoming wealthy.

I suggest you read about social mobility in the US vs EU.

Could genetics and IQ have something to do with wealth? The book by Richard Lynn and Tatu Vanhanen, “IQ and the Wealth of Nations” and “The Bell Curve” by Charles A. Murray and Richard Herrnstein seem to prove that.

That’s just racist people trying to justify things.. it’s very easy to claim IQ based on race by dumb people till you dig a bit deeper and understand the impact early education, environment and socio norms on the individual.

There are a ton of studies on this being done in the US, UK and EU and they all conclude the same thing.. you can’t run a race and conclude some are better when they start with every advantage imaginable. I find it hilarious when people claim race has a massive impact but can never provide an equal test case.

Please read The Bell Curve. It’s not politically correct but unfortunately. ..

I find it hilarious when people try to deny the very obvious link between intelligence and wealth. Just take a look at the top scorers in the international PISA tests and see how well their countries do in comparison to Africa. Then ask yourself why.

Denial.

Not a river in Egypt.

I find it hilarious that people accept that one can inherit hair and eye colour, height, body shape, etc, but if one implies that IQ can be inherited he is immediately shouted down for being racist. BTW, I am white, but have no problem accepting that Chinese, Japanese, Ashkenazi Jews and others have higher average IQ than whites.

Surely its far easier to understand the mechanisms for becoming (or staying) poor than it is to understand why people become (or stay) rich.

The first logical step in avoiding not becoming poor is by judging ones ability to actually afford a family before starting one, or otherwise put, understanding the repercussions of your actions.

Secondly would be a serious outlook on education, starting with primary education that sets a solid foundation for any future studies. 30% or 40% pass rates won’t cut it in the real world.

As the article points out, the rich will probably bounce back (whether through strategic marriages, clever ideas, hard work or better allocation of capital), so the rich are all too often easy targets to go to whenever the future is not looking too rosy for those less fortunate. In South Africa anyone with a house and car are probably deemed rich (although they are in reality most probably overextended financially).

Less rather address the cause of being poor, not rich.

The focus on “getting rich” instead of on “staying poor” struck me as well.

While there is no doubt that social capital helps, there are other psychological factors: agency, aspirations, locus of control etc. While education is one of the biggest factors, it cannot all be ascribed to “elite schools”; many kids from elite schools do NOT “make it” while some kids from “poor schools” do. What often drives the self-made rich is an obsession of escaping the poverty of their roots. Whether this is a healthy obsession or not is debatable.

“From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time”.
Friedrich August von Hayek, The Constitution Of Liberty

There might be some truth to it, but it has nothing to do with language or culture, or race. There are several examples in history where the losers who lost the “war” ended up winning the peace, e.g. Japan and Germany. There are more examples closer to home too.

To simply give those who do not have something which they have never had or would in any case never have, would simply and eventually return them back to their original position.

Consider the case of the European lottery winner of €170mil, he did not have much then got rich beyond anyone’s wildest imagination and after 3 years he was poor again.

Change cannot be sudden, change requires responsibility, education and effort.

Redistribution starts with responsible governing, cultural awareness and the mindset change so that people do not on both sides of the scale cause extreme of wealth and poverty.

If you didnt create it, you probably cant control it!

Ah but you can rename it!

The shocking level of poverty in the U.k. was only mitigated by the industrial revolution (jobs) and especially through birth control which eventually became available to the poor. Our local informal settlements are full of young women (including teenagers) who are pregnant, many become pregnant to obtain child grants. Absent fathers make the situation worse, these children have little chance in life, inadequate nutrition, early mental stimulation, rampant child rape etc. etc. So when we talk of upliftment and inequality it is these factors are the drivers of poverty.It is a social problem which cannot be rectified by redistribution.

Saying “Governments need to address the mechanisms by which people actually get rich (wealthy)” is no different to saying “Governments must change the environment in which donkeys live to enable them to turn into race horses”. Nice idea but in terms of wealth it’s not going to happen. To get them to become “rich” requires introduction of communism / socialism and we see how successful that has been.

How about rewarding proper family planning and addressing the out of control population explosion in our country, rather than rewarding and funding people who just cannot afford large families but yet continue thereby imposing further unsustainable burdend on the ever diminishing pool a real taxpayers…..close down the social gimme club, encourage and reward smaller families and give those children the parenting attention they deserve and a future….if not, being wealthy becomes a mere mirage in a land of universal poverty….unless of course you are part of the anc elite!

I think population control isn’t needed as such, more economic migration. South Africa suffers because we have idiotic leaders not because we have a large population. In fact if the last 10yrs has taught anyone anything then it’s that electing a kleptocratic party is arguably worse than a booming populous as I’ve seen plenty countries use the latter to their advantage.

Why do we have a diminishing tax payer base? Is it really the population growth or is that socio-economic growth is hindered by the politically corrupt?

What I find fascinating about Sa is that we also quick to blame politicians for their part.. but what happen to the management consultant firms? Why are they still functioning in SA? When it’s impacting an American or EU company the local companies involved have punitive measures placed on them but if they American, German etc then it’s just a slap on the wrist

That reward comes from the tax payers pocket. The only thing that must be rewarded is work, the harder the work the more the reward. Thinking people gets rewarded more than non thinkers.
It is a culture thing. It will never be rectified.

The ANC never promotes hard work, they prefer their supporters lazy and dependent.

Whilst I think the article is everywhere. It would be interesting if the study were done on Zimbabwe farmers who lost land without compensation. I know a few who adjusted,reinvented themselves and are doing well inspite of the inflation and meltdown that followed the farm grabs.

This is interesting. The study would be useful if it was completely frank about what sort of alliances had to be forged (probably with ZANU PF) and what rules were broken (exchange control?). Just about everywhere in the third world are small pockets of what looks like excellence whether it be mining, cutting indigenous timber, planting cash crops (tobacco, palms, sugar etc), sometimes for political big men or foreign governments (China, India and Saudi?).

One thing remains common – the general populace stay dirt poor and downtrodden.

Interesting thing case studies, always an alternative to disprove. Looking at the world over the years. Which continents have prosperity and wealth and which do not. Really simple or perhaps not.

With regards to population growth. For years China had a one or perhaps two child policy and where are they now as an economic force due to that policy?

If you have too many children in a household with a set income, the household will suffer. If the population in a country becomes too large the population will suffer and starve.

In which continent is this mostly prevalent now and over the years?

First step in becoming wealthier. Accept responsibility. Its the very step 90% refuse to take.

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