Why is it so hard to spread wealth?

Why is it so hard to spread wealth?


Recently Amancio Ortega became for a few hours the world’s richest man, this honor was short-lived as hours after Microsoft shares rose 11% to what Bill Gates’s fortune rose by $1,300 million and got the throne back. This is what happens to those who are fully loaded, one day wake up and realize have won (or lost) a billion. It does not happens to the rest of us, where we can tell the exact money we have without checking our bank account.

amancio orgeta zara

When we read the fortunes of the richest in the world makes us feel jealous, other feel insane and almost all believe that wealth is poorly distributed. The goods of Amancio sum up 73,000 million euros while 29% of Spaniards are at risk of poverty. Since I’m not Amancio nor I have the money I would not mind dusting it all to give to others. In fact I think they should allocate all the money from those who have more than I do. But this does not work well and distribute wealth is not that easy. Bloomberg explained it very well with this example:

“Imagine for a moment that you’re Amancio and more or less know your fortune, million up million down. In one of your current accounts, enters a hacker and steals € 10,000. Chances are quite high that you do not realize by yourself because your purchasing power will be exactly the same. You can still buy anything you want. The hacker, as well as good computer is a good person, he puts that money in the bank account of a poor person. Those 10,000 € is probably more than his annual salary and got him out for a while of the risk of poverty and could even use that money to study, start training or to buy a van to begin a delivery business. In those 10,000 € there’s not only a present but also there is future.

We changed the life of a person and Amancio nor has noticed. So why not do the same with the rest of €? Why not sacrifice a fortune for the sake of rest? The problem is that the rich cannot notice a timely theft but they notice a systematic appropriation of their savings that generally doesn’t come as hackers but in tax and this has a long-term involvement. When you raise taxes you reduce economic activity. Taxing consumption reduces the consumption as taxing investment, reduces investment. We wish it were the other way around, but in real life works this way.

On the other hand, there is the so-called “bucket Okun” in reference to the analogy described by the economist. When money from rich is distributed to the poor we should imagine that money is transported in a leaky bucket. Some of it will simply disappear along the way, so that the poor will not receive all the money that is taken from the rich. Money does not literally disappear, of course, but inefficiencies produce results that often can be characterized in this way. When there is no inefficiency, there is no leak in the bucket and a dollar less for the rich means one more dollar for the poor. With inefficient policies, the bucket leaks and the size of the leak measures the magnitude of the inefficiency.

global wealth

Measuring the size of the leak is not easy and depends on the maturity of the country, for example USA and the Council of Economic Advisers to President calculated that for every dollar that is distributed, $ 1.5 are collected. Of these fifty cents extra cost, dime owed to the taxpayer compliance costs (record keeping, time spent filling out tax forms, etc.) and the rest is attributable to distortions in economic behavior (effects on work, saving and spending).

Therefore, from € 73,000 million to Amancio “donate” only reach € 48,600 million to the poor (assuming we had the efficiency of USA) and most likely Amancio would close Inditex as to work for free to give it to others is no good deal, not even for the richest man in the world, or second riches…

Fortunately society is changing and super-rich are becoming donors of large parts of their fortunes. As everything else in the world, it all starts in the US. There are two great personalities that are always at the top of these proposals. Probably Bill Gates and Warren Buffett are the two more seriously  conscious about this issue and have taken many of those who follow them, as in the case of Facebook founder who has recently donate 99% of its shares to a foundation.

This is the best and fairest way to spread the wealth. So you know Amancio, don’t be cheap.