Daily Management Review

Robin Hood is Getting Unpopular


In the world of inequality, an egalitarian robber always been an attractive character - from the English Robin Hood to the US Jesse James. Many countries like to make heroes out of the bandits who take money from the rich and give to the poor.

The economy, in the most primitive sense, also supports this idea, since people having too much money prefer to save them and if funds are redirected to those who have not, the money will be spent immediately, stimulating consumption and GDP growth.

From politics perspective, the redistribution is also a very attractive thing. There aren’t too many billionaires, so that, politicians benefit more by increasing taxes on their palaces (more voters cast their votes for them. However, those who dream of excessive taxation of wealth, need to be careful: this strategy does more harm than good.
The idea that redistribution could push growth, has quite a few supporters. In 1920, the English economist Arthur Cecil Pigou wrote that the annual transfer of resources from the "relatively wealthy to relatively poor" could increase the total volume of products produced in the country.

Pigou considered three ways of using revenue: consumption or investment by the rich and the consumption by the poor.

The transfer of purchasing power to the poor citizens of almost no impact on the spending of their wealthy compatriots. Exhaustion of funds from the pockets of the rich will reduce investment, but still it is less profitable to the economy than the massive buying better food, clothing and education by the poor. Thus, the redistribution could stimulate the economy.

Pigou's position is based on the theory that poor families would spend more if they had the funds, and wealthy individuals could balance the intake if they suddenly lost some income. In order to check the validity of this idea, scientists of Princeton and New York Universities analyzed a huge amount of micro-economic statistics.

They wanted to scrutinize the household income and welfare level in eight developed economies.

Scientists included salaries, various government benefits and compensation in the income of each household, as well as private transfers (such as alimony). They also considered liquid assets: cash in the bank, stocks and bonds, or something that can be easily sold.

Scientists have searched for families who do not have such a safety cushion (or access to credit) and, therefore, could not survive short-term reduction in income without the negative effects. Citizens, whose consumption changes when income gets less, are characterized as people who live hand-to-mouth.

However, the term itself is not as straightforward as it seems at first glance. Statistics show that an average American has a certain volume of liquid funds in bank accounts, and liquid wealth (retirement account, and the house), but very little of bonds or shares.

Although about 30% live hand-to-mouth, two thirds of them have sufficient liquid resources. These people are hard to turn into one of the categories of Robin Hood (rich or poor) - they barely cover living expenses with existing cash, but they have a lot of liquid assets.

Mortgage debt is one of the reasons why people do not have enough cash. Focusing on American homeowners, the researchers found that only 20% of those who have a small mortgage live from paycheck to paycheck. However, once debt reaches the value of the house, a lot more people - close to 50% - can barely make ends meet.

Meanwhile, lawmakers should not assume that the citizens who are in a difficult financial position, unanimously support the redistribution of wealth. A study carried out by Yale University said that in theory, support for redistribution should increase, as the workers' wages fall below the average income in the country. However, the reality is different: support for redistribution remains unchanged or even fall when inequality increases.

It all depends on the age. Those who are younger than 40 years, behave quite expected: support for redistribution increases with the level of inequality. The situation with the citizens over 65 years old is quite different, perhaps because there’s not much of them in the category of "non-monetary".

In 1970-ies., when surveys started, they are often supported redistribution than the rest of the population. But by the mid-2000s, they are less liked the idea. Apparently, they were afraid that help the poor may reduce their benefits, especially in health care.

This means that the beneficiaries of the fiscal stimulus will get less in number if we aim only on the basis of income: the short-term bonuses should also be offered to rich citizens. As for the politicians, who are adopting the rhetoric of Robin Hood, they should be mindful of the old electorate army. They now tend to support the Sheriff of Nottingham.

source: economist.com