Ever since the advent of the welfare state, liberals have argued that it is essential that the federal government tax the rich in order to give to the poor. Otherwise, they claim, in a free-market economy, the rich only get richer and the poor only get poorer.
If the rich only get richer, would someone mind explaining to me why all those rich people who invested their money with Bernie Madoff are now poor? That’s right — thousands of rich people have lost fortunes, in some cases all they have.
Another example involves Adolf Merckle, a German billionaire who recently committed suicide. Yes, I said billionaire, with a “b.” Why did Merckle kill himself? Because his entire billion-dollar financial empire was about to collapse. Why? Because of risky investments that Merckle had made in Volkswagen that jeopardized his entire billion-dollar fortune.
There is no 100 percent security in life for anyone, not even for the rich. People can make the wrong investments. They can trust the wrong people with their money. They can put their money in a bank that goes under. They can store money under their mattress at home, only to see the house go up in flames. They can invest in government bonds that go into default. They can buy annuities from companies that go bankrupt.
The undeniable fact is that the market is a tremendous redistributer of wealth.
In the business world, a company can become rich by selling products that consumers want to buy. A good example is Microsoft. But success and wealth are no guarantee of future existence. If Microsoft stops satisfying consumers or if another business comes along and offers a better product, Microsoft can begin losing market share and even ultimately go out of business.
A good example of this phenomenon is the U.S. automobile industry. Do you recall when college economics textbooks used to refer to U.S. auto companies as an “oligopoly”? That was a fancy word for a few rich, big, and powerful companies that are able to set whatever prices they want for their products.
Well, if those auto companies were so big and powerful, why are they desperately seeking a government bailout today? The fact is that as big and rich as they used to be, they failed to continue satisfying consumers, especially compared to Japanese automakers, and so they lost market share and now are even threatened with extinction.
Finally, we would be remiss if we failed to notice that the power that liberals have vested in the federal government to tax the rich and give to the poor has now been used to tax the poor and middle class to give to the rich. That’s what the federal bailout of Wall Street is all about. How ironic is that?
Since redistribution of wealth is the principle justification for the welfare state, what do we need the welfare state for? Doesn’t the free market do that job fine? In fact, isn’t the free-market’s redistribution of wealth more just than that of the welfare state given that the former is based on consumer preferences and voluntary actions in the marketplace while the latter is based on political preferences and coercive dictates in the political arena?