A Money Desert

A Money Desert

May 11
A Money Desert

Disclaimer:  I’ve always hated it when an author starts something with a disclaimer, yet I find that a disclaimer seems warranted for this post.  I’m writing this post to try out an idea and I don’t have any other forum suitable for such a thing.  I’m posting it here in hopes that I can solicit feedback and further refine the idea.  I’m not an economist, so this idea could be fundamentally flawed or it might even be a well-known concept to which I haven’t been exposed.  For now, I’m trying it out to see what you and I think about it.

Take all of the water on Earth.  I mean this quite literally – imagine you had a giant vacuum and could suck every drop of water off of the planet.  Now imagine that all of the water could be evenly distributed around the globe and then deposited as rain.  In other words, every location on the planet would get an equal amount of rain.  Let’s assume we could do this in such a way as to not cause any flooding.

When the rain ends, where will the water be?  Will the water stay where it fell?

I believe we’ll find that some places collect water while the water flows away from other places.  Eventually, most (if not all) of the water will find its way into ponds, lakes, seas, and oceans.

Why?  Why would the water gather in these areas?  Because there’s something about them that causes them to store water.  Maybe they are at a lower elevation than surrounding areas and the water naturally flows to the lower places.  Maybe there are surrounding highlands or dams that cause the area to hold water.  Regardless, there will be something that causes water to accumulate in some places but not others.  Some places retain water while others do not.

Suppose we repeated the experiment.  Would you expect the water to go to different places than the previous time?  Would we get new oceans that we didn’t have before?  Or would you expect the water to eventually find its way back to the same places that it was in before?

I suspect that the water would be in almost all the same places as before.  There there is something that naturally causes certain areas to attract water and no matter where the water starts, it will eventually end in those places.

Rain, then, serves as a water redistribution system.  It pulls water from the larger collections of it (rivers, lakes, seas, and oceans) via evaporation and then drops the water via rain onto other areas.  This water then eventually drains back to where it came from – rivers, lakes, seas, and oceans.  From there, it evaporates again, rains, and then returns.

Here’s where my thought experiment takes place.

What if money works very similar to water?

If money behaves like water, then it is naturally for it to accumulate in certain “locations” – these could be geographical regions, individuals, companies, or anything else that “holds” money.  There is something about these “locations” that naturally attract and accumulate money.

For simplicity, let’s refer to these as “wealthy individuals.”

If money and water behave similarly, then there will be individuals from whom money flows and there will be individuals that accumulate money from that flow.  In other words, some people are more prone to spending and others are more prone to accumulating.  The spenders would be like the mountains and highlands from which water quickly flows down.  Those who accumulate will be more like lakes and oceans.

Now suppose we collect all of the money in the world and we drop it evenly around the globe.  Personally, I believe that the money would all eventually pool in ways very similar to where it is now.  As we’ve seen repeatedly with lottery winners, sudden windfalls of money do not change who we are or how we treat money – those prone to spend will spend it and those prone to save will save it.  I haven’t looked for any research, but I suspect that savers are less likely to buy lottery tickets than spenders.

So, if the thought experiment holds, if money and water behave similarly, then there are wealthy individuals who will naturally accumulate more money than will most other people, similar to how the oceans collect most of the water on our planet.  There is something about these wealthy individuals that causes them to accumulate the money that others spend.

Streams and rivers form the “income” for lakes and oceans.  Without rain, all of the water would eventually be in lakes and oceans.  Rain is what keeps it moving, even if the rain eventually results in more “income” for the lakes and oceans.

Similarly, there must also by monetary “rain” – a means to redistribute money from where it has accumulated and give it back to those who will spend it.  It will eventually arrive and settle again with a wealthy individual.

We have several mechanisms in place that are an effort to create monetary “rain.”

Government entitlement programs are one such mechanism.  However, these programs are funded primarily via income tax.  Think of income tax like trying to make a river more narrow – the water will still get to where it’s going, but it’s going to take longer to get there.  Making a river more narrow will not take water out of a lake or ocean – at best, it slows down how quickly they grow.

Another mechanism is the minimum wage.  Increasing the minimum wage gets more “water” to the highest points (from where it will run back down again).  However, this extra “water” isn’t coming from the large pools – this is more like the mountains trying to water themselves.  The cost for minimum wage hikes has relatively little impact on the wealthy and thus isn’t a sufficient redistribution mechanism.

Perhaps the closest thing we have to monetary “evaporation” is the estate tax (or the “death tax” as some call it).  The estate tax takes a portion of an individual’s wealth when they die.  It only impacts wealth above a certain threshold (most Americans will be unaffected by an estate tax because their estate isn’t large enough).  In other words, the estate tax actually draws money from the large “lakes” and “oceans” in which it has accumulated.  To my knowledge, it is the only mechanism that actually draws from the pool of wealth rather than the income – the only thing that actually simulates “rain” from a monetary perspective.

To truly simulate the way rain works with water, we would have to implement a mechanism that draws money based on net worth rather than income.  I believe that the idea has always been that those with more would spend more, thus creating the “rain” effect.  While this is true, it isn’t proportionate.

Take a lake, for example.  Water comes into the lake via streams, but there is no natural exit for the water.  The dam that created the lake determines the rate at which water flows out of the lake.  That’s how it became a lake in the first place – more water came in than went out.  That’s how most people become wealthy – they spend less than they make and over time this accumulates wealth the same way a lake accumulates water.  As long as the water leaving the lake is no greater than the water coming into the lake, the lake will never shrink.

Ultimately, I think this is the flaw in “trickle-down” economics – it assumes that the “oceans” are the tops of the mountains and that water (money) will flow down.  Nature doesn’t work that way – the great bodies of water are at the bottom, collecting, rather than at the top, dispersing.  Money is similar — it flows down from the spenders to the accumulators, and it is the accumulators who amass wealth because they accumulate.  Without a mechanism to get the money back to the spenders, all of the money flows to the accumulators, the wealthy, and then stagnates there.

What could possibly get money back into the hands of those who spend it and keep the economy flowing?

What if everyone “returned” at least 10% of their net worth every year?

Regardless of what the money is “spent” on — whether the money is given to charity, spent on goods and services, given to government programs or projects, etc. – the money would be moving.  If everyone spent or gave 10% of everything they own, it would keep the money flowing, the water would be moving.  Ultimately, it would flow back into the giant pools again, only to be redistributed yet again.

Honestly, this should be happening anyway.

I am not convinced that “income inequality” is a real issue.  I believe it’s more to do with wealth hoarding.  I don’t have a problem with anyone making or accumulating as much as they wish, but if it doesn’t move, if it doesn’t go anywhere, then that “ocean” of wealth is depriving someone of “rain.”

6 comments

  1. Scott

    I think that there are a couple of problems with your analogy. First of all, “natural evaporation” occurs. The wealthy do not sit on piles of wealth like Smaug or swim through it like Scrooge McDuck. Even the wealthiest spend their money to support their lifestyle and their investments further distribute the money in the form of jobs (and income) they generate for folks upstream (in your analogy).

    The second serious flaw is a misunderstanding of the estate tax. If the estate tax simply hit liquid assets, it would be as you described. It does not do that – it hits total asset value.

    This means that a family farm of a couple hundred acres (the US government says the average “small family farm” is 231 acres) can easily be worth millions of dollars on paper (and subject to the estate tax) once you include the combine, barns, silos, trucks, home, etc. This means that when mom or dad dies, the family often has to sell the farm for significantly less than its paper value to meet the instantaneous tax burden created by a death.

    There is a similar issue with small businesses. A small business that employs a few dozen people can easily have $5-10 million in assets on paper (investments in the business over time), and owners have often found themselves having to sell the business at a loss and let employees go to pay the tax bill that can rise to 55% of the paper value of an estate upon the death of its owner.

    Imagine the chaos that would be caused if one man owned $100 billion worth of stock in a company he founded that was part of several major market indices and then died, subjecting himself to the estate tax. The family suddenly owes $50 billion to the federal government (and maybe more to the state), and has to start selling off stock wildly, but the price plummets as the selloff begins. Ultimately, they might have to sell off their entire stake to satisfy their debt, and they would drag down smaller investors and the whole market as this happens.

    Money is a tool, like any other tool. Some people use it wisely, some people use it poorly. We should all use it as God intended – to glorify Him and help our fellow man. This should, however, be a voluntary activity on our parts rather than a forced re-distribution. Just like attempts to dam up the rivers and re-distribute the waters have often proved to do more harm than good, so has it happened with money throughout history.

    • Thank you for the feedback, Scott. I apologize if I gave the impression that I support a death tax — I don’t. I was merely recognizing that it’s the only thing that comes close to being an actual wealth recycling mechanism. I would very much like to see the estate tax go away.

      As for Smaug or Scrooge McDuck, while our wealthy might not sit on or swim in piles of gold, they do hoard it. A small portion of the population holds a majority of the wealth. One percent of the global adult population holds over 50% of the total global wealth.

      I abhor the idea of forced wealth redistribution; however, such a thing may become necessary. Or worse, the majority of the population may use Democracy to inflict it upon the wealthy minority. I’m hoping to suggest an alternative, by choice, in order to avoid a coerced redistribution.

      • Scott

        From a global perspective, the residents of the United States are almost universally in the top 1%. I think this creates some level of envy, and many of the international initiatives we see are subtle and not so subtle attempts to force the re-distribution from the U.S. to everyone else.

        Historically speaking, there has always been a 1%, and likely will be. This is why Jesus said the poor will be with us always – even in our extreme wealth, we will always have people who have less.

        I believe education would help people first understand that they are far better off than their peers around the world, second help everyone globally understand how they are better off than people even a hundred years ago, and thirdly help everyone understand the nature of the opportunities available to them to improve their own situation.

        Education is the main form of re-distribution that should happen, but unfortunately many public education systems have been converted into indoctrination systems. I will never forget someone in one of my graduate education classes who grew up in Romania who basically said that everything we see and complain about with the indoctrination into statist/socialist mindset really is happening and it is exactly what they lived through in the communist bloc countries 30 years ago.

        This is why I support free market solutions to education, because the folks who are proposing solutions driven by the almighty dollar are trying to attract folks with a better product.

  2. Mac

    From what I have been able to observe, it seems like the monetary “oceans” we see today behave much differently than real bodies of water. A body of water almost always has some limit. Once it reaches capacity, it spills over. That wealthy 1% never spills over. In fact, many of them spend most of their time trying to figure out ways to increase capacity instead of merely filling up and eventually spilling over. Have you read up on Missouri Senate bill 43? If half of what I’ve been able to learn about it is true, I’m shocked that not only would a conservative state legislature pass it, but that a conservative Governor would sign it. Why would they support a bill that will allow a nurse who refuses to participate in an abortion because of religious reasons to be fired without the ability to take the employer to court? Why would they pass a bill that would allow a nursing home owner to fire an employee who blows the whistle on medicare fraud, without the possibility of legal action? The only answer I can come up with is that they’re drowning with special interest money and they want to accumulate as much of it as they can before it dries up. That’s the main thing I see wrong with your water analogy. People with money, while they do employ folks and do create jobs, spend much more time ensuring that they never reach capacity. They’re building dams and diversion channels from every direction they can think of and it’s leaving lots of deserts in much of the country.

    • Well said! That is my concern as well. In nature, there is flooding when too much water runs into an area — it spills out into the area around it. We rarely see this with wealth…unless it’s a lottery winner!

      • Scott

        We often see the “water” leaving the wealthy, it just takes a little longer. Who are the 100 richest people in the world today? How does that list compare to 50 years ago? 100 years ago? 200 years ago? Intergenerational wealth gets squandered by following generations because they often never learned to make the sacrifices necessary to build it, but people get frustrated because they don’t happen to be an heir of an ultra-wealthy family who will have to learn their lessons the hard way.

        Interestingly enough, there is mobility even within income quintiles today. According to US government statistics, a significant percentage of every income quintile moved into a different income quintile in just a couple of years. Between 2007 and 2009, over 30% of the bottom income quintile moved up one or more quintiles (5% of them moved into the top two quintiles) and a qurter of the people in the top income quintile dropped one or more quintiles during that same time.

        People get frustrated because they look at their own immediate surroundings and say “Today looks a lot like yesterday” without looking at the big picture of how today looks compared to 5 years ago or 50 years ago. We need to teach perspective more than anything else.

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