Matt Bruenig’s Social Wealth Fund Wouldn’t Change Wealth Distribution By A Single Mote Nor Iota

Matt Bruenig has come up with an idea to create a vast investment fund, owned collectively by all Americans. The idea is to change the concentration of wealth in our society. Quite why having the one large fund reduces concentration isn’t quite explained but you know, reasons because. The actual problem with this idea is that it wouldn’t change the wealth distribution by one single mote, iota nor whit. The reason for this being that Bruenig doesn’t understand the very basics of how we measure the wealth distribution.

We do not measure the effects of government redistribution of wealth on the wealth distribution. Therefore more government redistribution of wealth does not change the wealth distribution. And I’m afraid that it’s just that simple.

By analogy with the US poverty line. What is measured is market incomes. If your market income – your income before Section 8, the EITC, Snap and all the rest – is below a certain number then you are counted as being below the poverty line. OK, there are some problems with such a system of measurement but that’s what it is. And this means that we cannot reduce the number of people below the poverty line by, say increasing Section 8 vouchers, the EITC, or Snap. Because we don’t count those when calculating who is below the poverty line.

Note what I am not saying here. It’s obvious that the three programs all reduce the incidence of poverty. Poor people, after they receive them, have more, they’re less poor. We’ve alleviated poverty through having those programs. But the way we count, the way we calculate the number of people below the poverty line, doesn’t change in the slightest. Say that we define 13% of Americans as being poor. Not the right number but around that right one without looking it up. Now we triple the amount of money we spend on those three programs, EITC, Snap and Section 8. And extra few hundred billion dollars are now passed onto those poor people, they’re definitely and definitively less poor.

The number of people we define as poor is still 13% of all Americans. We’ve tripled poverty alleviation efforts and reduced the number of poor people by not one single human being.

The same is true of the wealth distribution. Thus this plan just will not work at all:

In this paper, I propose that the US government tackle the problem of wealth inequality by creating a social wealth fund (swf) and issuing one share of ownership in the fund to every American. After the fund is created, the government will gradually accumulate assets for the fund to manage, such as stocks, bonds, and real estate. As the assets under management increase, the value of the shares held by the citizen-owners will increase, causing wealth inequality to fall. Although the citizen-owners will not be permitted to sell their shares, they will be paid a universal basic dividend (ubd) each year from the investment income earned by the fund.

We’ll not change wealth inequality at all. Because the way we measure wealth inequality means that it won’t change wealth inequality. Matt Yglesias seems to like it but then when did we look there for detailed economic knowledge?

That social wealth fund dividend would ultimately be dependent upon government. A number of references are made to the Alaska fund which can be and sometimes is determined by the legislature, not purely the fund’s returns. That puts it firmly – even if other attributes of it did not, something I would argue they definitely do anyway – into the set of “things government does.” And that set of things government does isn’t included in our measurements of the distribution of wealth.

I say this not because I am a running dog of the plutocratic capitalist lackeys. I am, of course, but I don’t say it because I am. I say it because its simply true. Taking 1, 10, 50% of America’s wealth and running it through a government fund doesn’t change the American wealth distribution.

The Ur document on wealth distribution is Saez and Zucman. This is the one that tells us all about how the country is returning to 19th century levels of inequality, soaring unfairness, robber barons and all the rest. And yet here is their discussion of either income or wealth redistribution done through government:

II.A. The Wealth Concept We Use
Let us first define the concept of wealth that we consider in
this paper. Wealth is the current market value of all the assets
owned by households net of all their debts. Following international
standards codified in the System of National Accounts
(United Nations 2009), assets include all the non-financial and
financial assets over which ownership rights can be enforced and
that provide economic benefits to their owners.
Our definition of wealth includes all pension wealth—
whether held in individual retirement accounts, or through pension
funds and life insurance companies—with the exception of
Social Security and unfunded defined benefit pensions.4 Although
Social Security matters for saving decisions, the same is true for
all promises of future government transfers. Including Social
Security in wealth would thus call for including the present
value of future Medicare benefits, future government education
spending for one’s children, etc., net of future taxes. It is not clear
where to stop, and such computations are inherently fragile because
of the lack of observable market prices for these types of
assets. Unfunded defined benefit pensions are promises of future
payments that are not backed by actual wealth. The vast majority
(94% in 2013) of unfunded pension entitlements are for government
employees (federal and local), thus are conceptually similar
to promises of future government transfers, and just like those
are better excluded from wealth. According to the Financial
Accounts, unfunded defined benefit pensions represent the equivalent
of 5% of total household wealth today, down from 10–15% in
the 1960s and 1970s.5

We don’t include government transfers within our definition of wealth. Someone might be getting $20,000 a year from Social Security but that’s not wealth, while a $20,000 a year funded private sector pension is wealth. The same is true of all government transfer programs. They’re not wealth.

A social welfare fund is a government transfer of income. It’s not wealth in the manner we calculate wealth, therefore a social welfare fund isn’t going to be a change in the wealth distribution, isn’t going to change soaring wealth inequality.

At which point we reach an obviously stupidity. Seriously? We’re saying that taking 50% of America’s wealth off all the rich people and sending the cash, annually, to everyone, isn’t going to change the wealth distribution? We’d better change the way we’re measuring this so as not to commit that stupidity, right? Yes, OK, why not?

So, let us indeed say that all those government transfers are wealth. After all, the Saez and Zucman method is to look at the income streams from various sources, capitalise them and then say that’s the amount of wealth those income streams represent. It’s a pretty good method of defining wealth as well. I’ve certainly no major problem with it. And if we do this a $20,000 a year income from Social Security is the same as a $20,000 a year income from a private, funded, pension. Which seems pretty logical to me too.

But that now causes a horrible problem for our claims of massive wealth inequality. Because we do an awful lot of income redistribution. Each of those flows being equal to some capital amount when we, err, capitalise that income stream. How much money is the American welfare state spraying around? A couple of trillion dollars would be a fair estimate once we include Medicare, Medicaid, the various benefits in kind programs, add in the States, and so on. At a 5% discount rate that’s some $40 trillion in wealth. Our current estimate of household wealth, the one Bruenig is using, is around $100 trillion. Now we’re saying we’re already redistributing 40% of that? The lower the discount rate we use the more likely that redistribution will be more than the wealth we’re complaining isn’t being redistributed. One of the Saez and Zucman capitalisation calculations, a factor of 37 for rental income, has this government redistributed wealth approaching that total household wealth number.

That does rather kill off our claims that we’ve either unprecedented or even excessive levels of wealth inequality, doesn’t it? The American taxation system is rather progressive, very much more so than near all European systems. Do note here, progressive taxation doesn’t mean high taxes on the rich. It’s a measure of how the portion of your income floating off in taxation rises as your income rises. And yes, the American system, despite having lower taxes in general, is more progressive than most others. It’s the absence of a large consumption tax like a VAT which does it. So, we tax those income streams – you know, the ones we capitalise to estimate their wealth – of the rich in order to provide income streams for poorer people – you know, the ones we should be capitalising to estimate their wealth. Thus do we redistribute wealth already, we just don’t count any of it as being wealth redistribution.

At which point we reach the Morton’s Fork of Bruenig’s proposal. If we measure wealth as we currently do then nicking 50% of the wealth of the country – or whatever portion we care to play with – off the rich to distribute through a social welfare fund to everyone doesn’t change the wealth distribution nor the inequality of it. And if we change the measurement method then it’s not entirely obvious that we need to be doing more redistribution, for we would then be measuring the tens of trillions in wealth owned by the general populace through the Great Society programs and the general existence of a welfare state. Either the social welfare fund won’t work or we don’t need it that is. Neither of which is a great recommendation for a public policy proposal.

But then you know, I’m just a lackey dog running of the capitalist plutocrats. Picky on the details of how things work and are measured to. And what’s that sort of pedantry from such a person worth against the grand vision of doing something hugely disruptive, highly expensive and entirely and totally useless?

Yes, there is a reason my political career was so blissfully short. Caring about real world results is not a useful attribute in that line of work.