GINI and wealth.

Over in the Twittersphere, I occasionally argue with lefties, who occasionally make points which cannot be refuted in 140 characters.

socialism wins: if left wing ideas don’t work. How come the richest nations tend to have low gini (high equity)?

The answer is simple. The poorest nations tend to be the ones with either a) socialist command economies or b) robber barons looting the economy (or more likely in practice, robber barons using socialist rhetoric). As you move up the economic chain, you have freer markets, and better wealth distribution. Capitalism is good at making goods cheap enough for everyone, and paying everyone enough to afford their needs with some surplus for luxuries. The steady increase in wealth enjoyed by capitalist economies is because of the incentives to increase productivity per worker. Because a western worker is more productive than his Chinese counterpart you need fewer of them, and the low value added jobs tend to concentrate in the developing economies. The idea expressed that socialism leads to wealth is so easily dismissed by the near-perfect experiment of Post-war Germany in which the capitalist Federal Republic got much, much richer (and much more equal) than the savagely repressive misery-box that was the Democratic republic. In the words of the famous political theorist, JCR Clarkson

“Socialism is such a crap system, it took a nation populated by Germans… and made it poor”

The best means to get rich in a developed economy is to serve the broad mass of the population well by giving them what they want at a price they can afford, things, especially manufactures but also services get steadily cheaper. Thus most people get “free” bank accounts. Mobile phones and computers are in the range of more or less everyone. Everyone can have access to a car. Providing these things to a lot of people makes a lot of people very wealthy, and makes everyone a bit wealthier. Rich countries “capitalist” economies are very much more egalitarian than most so-called socialist ones. Separate lanes for the nomenkutura’s cars, comrade?

Contrast with a typical poor country, where nepotism is rife, and civil servants’ remuneration is only worthwhile when bribes are taken into account. The second best correlation with wealth is a lack of corruption. An un-corrupt country will tend to avoid robber barons in positions of political power and tend to lower GINI inequality. There is no incentive to supply goods and services to the population because any wealth generated will be confiscated, or be eaten up by the bribes for “permits” to do business.

Thus low GINI is correlated with high wealth. However to suggest that it follows that a government should follow redistributive policies to lower GINI by aggressively taxing the rich to promote growth, is a cum hoc ergo propter hoc logical fallacy. Put another way, it’s stupid.

The best correlations are between wealth and economic freedom. This is independent of the size of the state sector, redistributive nature of the tax system or total tax take as a percentage of GDP. Thus the Nordic countries, though they have a very high tax rate (though not, thanks to Gordon Brown, that much higher than the UK) they are rich because they score highly in terms of economic freedom. There is low corruption, and relatively little red tape. The UK falls down the GINI list because of 1) a big regional divide: socialist shit-holes to the north and a rich south east, and 2) the presence, not shared by most of Europe, of a relatively large number of ultra-rich and 3) a big, for a rich country welfare-dependent underclass.

So. If you think (as I do) that it is to the UKs benefit that London is able to attract the international super rich, then focusing on GINI is going to be counter productive. Ever higher tax rates are not conducive to economic growth, nor do they lead to happiness – they are correlated to these things – only a relatively happy, stable, rich country will tolerate high taxes for example. Causing your richest, most productive citizens to flee to more amenable economic climates (added to the allure of better weather) is not going to help anyone.

The causes of high wealth are economic freedom – something the Nordics could teach Labour’s northern fiefs a thing or two about. The state funds services in Scandinavia, but PROVIDES less than the UK state does. Belief and trust in Markets as a means to efficient allocation of resources leads to wealth, because government intervention usually causes more problems than it solves. A market, even a state financed one, but with consumers making decisions rather than bureaucrats makes for better, and more efficient allocation of resources. A more efficient allocation of resources is another way of putting ‘more wealth’.

A simple, fair tax system (ie not one designed by Gordon Brown) leads to fairer distribution of the tax burden, rather than enormous burdens put on the working poor, whilst the rich enjoy loopholes in the overly complex code. A welfare state with perverse incentive against work and in favour of single motherhood, as the UK’s keeps the numerous underclass down. None of the UK’s excess inequality (to the extent you believe that’s a problem in and of itself) is caused by “capitalism”. The UK’s high inequaltiy is because poor incentives in the welfare state mitigate against the poor getting work, and living in stable families. At the top inequality is increased because London attracts a lot of super wealthy, about whose presence, no-one should care.

So where does this leave New Red Dawn’s assertion that low inequality causes high wealth? The are correlated, for sure, but amongst rich world nations, even that correlation breaks down. Above a certain level – middle income countries around Portugal’s GDP per capita (funnily enough, this is where the Easterlin paradox starts), GINI’s correlation with wealth becomes more tenuous. The richest large country, the USA is also relatively unequal. The unequal UK and France are about as rich as the egalitarian Germany.

It is ironic that the people most obsessed by GINI are the people most likely to oppose the one policy of the UK governing Coalition most likely to do something about it: free schools.

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