On Income Redistribution, Part 1

This is the first of two articles on income distribution. Today we analyze the arguments of a man who suffers from a serious case of Marxism.

There is an ongoing philosophical debate in the Western World about how to distribute the proceeds of economic activity. In good economic times this debate is not as tense as it is in recessions. The reason is simple: it is relatively easy for low-income workers to make a decent living and to find new opportunities; at the other end of the scale, businesses make good profits and can cope with high taxes more easily than they can in tough economic times.

As soon as a recession opens up and jobs become scarce, the dividing line between those who make a good living and those who live on the dole becomes much more visible. This tends to ignite a more tense debate over income redistribution and other measures to “spread the wealth around” as Obama put it in his presidential campaign in 2008. One reason for this is that the entitlement programs that redistribute income are in higher demand in a recession than otherwise, while at the same time fewer people pay the taxes that fund those entitlements.

It is important to remember that the swings in the business cycle do not change the foundations for the disagreeing philosophical arguments for and against income redistribution. Nevertheless, the connections between the highly theoretical level of political philosophy and the dire circumstances of poverty are always easier to follow in a country where jobs are scarce and despair is just around the corner.

South Africa is one of those countries. After almost two decades of increasingly destructive ANC rule, this brave nation on the edge of the African continent suffers from widespread poverty, rampant unemployment, high crime and political corruption that could in the end destroy the rule of law. In the midst of all this, the differences between those who live on their own work and those who live on someone else’s look very ugly indeed.

With this in mind, it is understandable why some defenders of income redistribution take to the keyboard and write long, passionate pleas for more tax-funded entitlements. One example is a man namned Itumeleng Mahabane, who writes in Business Day, South Africa’s best news site. Mr. Mahabane, a corporate communications expert, eloquently puts the question of income redistribution in the street corners of the poorest neighborhoods of South Africa:

There is an important conversation South Africa is trying to have about jobs and wages. Typically for a divided country, the truth is the casualty of the attempt at dialogue, replaced by ideology and prejudice. First let us deal with the worrisome rhetoric from people who have never struggled to find gainful employment, yet argue that any job is a good job. This is nonsense.

As a background, unemployment among blacks in South Africa exceeds 30 percent, according some measures by a hefty margin. At the same time there are calls for a hate tax on high incomes, in order to expand the welfare state’s entitlement programs. Such a tax would obviously not help create more jobs, but only deepen the dependency among the poor on government.

With this in mind, let’s continue to listen to Mr. Mahabane, who again says that it is nonsense to claim that any job is better than living on taxpayers’ money:

Say you have one [job] paying R1,600 monthly, your transport costs are R600 and your housing R800 a month and you have two children at school. It doesn’t take a genius, or even an economist, to figure out that this is not sustainable employment. One day you’ll turn up late for work since you walked for hours to get there as you had no transport money, whereupon your boss will fire you because he is tired of your excuses and he needs reliable Malawians.

This is a reference to the inflow of immigrants to South Africa from other African nations, such as Malawi. The question though that Mr. Mahabane conveniently skips is: if a Malawian can make it on that money, why can’t a South African? His answer would be to go back and point again at the two kids he threw into the equation. But to make the comparison fair he has to attach two kids to the Malawian as well. Which of course he does not do.

Back to his op-ed:

People glibly talk about the cost of unskilled labour in Mexico versus South Africa but do not bother to compare other factors, such as transport costs as a percentage of wages. This also is where the argument of income grants creating anti-work attitudes are wide of the mark.

Before we get to the numbers he provides, let us note one thing. So far Mr. Mahabane’s argument has been completely isolated from the rest of the economy. This way he has conveniently avoided – or should we say evaded – the problems caused by a socialist government. The ANC is aggressively socialist and has created a business climate that is uncertain at best, destructive at worst. For this reason, many poor South Africans have to look for work far away from where they live: job creation is simply too difficult a task for many entrepreneurs and businesses.

Mr. Mahabane again:

If, say, you earn R1,400, spend R600 on accommodation and R600 on transport and have a child grant of R250, you are very clearly not only better off working, but the grant actually helps to keep you in employment and therefore enables you to be a net contributor to the economy.

Does this person, making R1,400 per month, pay more than R250 per month in taxes? That is what Mr. Mahabane is implying. If so, why not let this person keep all his money and terminate the entitlement. That will relieve taxpayers of the cost of all the bureaucrats administering the entitlement, and it will give low-income workers more control over their own finances.

Then Mr. Mahabane goes Marxist:

An interesting debate on wages and productivity growth has exploded in the US, courtesy of Elizabeth Warren, a former Harvard law professor who caused much consternation for pushing Barack Obama’s administration to create a consumer financial protection agency. Warren is suggesting that US companies have enjoyed significant productivity gains over four decades even as the minimum wage has stagnated, failing to keep up with inflation — implying that investors have taken all the upside and left the poorest Americans poorer than they were 30 years ago.

This is nonsense. About 2.9 percent of all the 130 million working Americans earn minimum wage or less. This share went up when the federal minimum wage was raised from $5.15 to $7.25, but adjusted for that change the share living on minimum wage has barely changed over the past ten years. Therefore, it is completely false to use this number as an indicator of the overall prosperity among American workers.

But Mr. Mahabane is not after accuracy here. He is building up to a Marxist punchline:

Warren’s example, which says minimum wages could rise to $24 an hour and still mean that corporates have benefited from productivity gains of the past four decades is, seemingly, simplistic. But it has achieved its point of sparking an evidence-based debate about what happens to the surplus of suppressed wages and increased productivity. Amherst economist Arindrajit Dub, whose research Warren used, showed that if minimum wages had risen at the same rate as the incomes of the 1%, the minimum wage would be $30 an hour instead of $7 an hour.

Again, Mr. Mahabane ignores the marginal quantitative meaning of the minimum wage – but he also ignores the positive functional meaning it has. On the one hand, 97.1 percent of all Americans make more than the minimum wage, thus mooting Mr. Mahabane’s point; on the other hand the minimum wage guarantees that employers who offer low-skilled work, such as in the fast-food industry, can continue to provide opportunities for high-school and college kids to earn a little extra on the side. These kids in turn earn valuable experience from the labor market, which helps them in their future pursuit of better paying jobs when they graduate.

Mr. Mahabane and other Marxists disregard this aspect of the minimum wage. All they see is a “surplus” that the worker produces, a surplus defined by Marx in his warped version of the labor theory of value. But the fact of the matter is that no one has ever been able to empirically establish the existence of the Marxist “surplus” – it is a good-looking theory, but that is about it.

Well, let’s hear Mr. Mahabane lead his argument to a conclusion:

There is a vital conversation to be had about how we increase household income. It includes conversations about productivity, minimum wages, trade-offs that might include the loss of uncompetitive industries and the jobs they sustain. It should be pragmatic and evidence-based and focus on logical consequences as opposed to ideological bent. It will be difficult, fraught and with no easy answers, but it must happen.

For all his eloquence, Mr. Mahabane is a dyed-in-the-wool Marxist who believes that there is only one way to increase household income: take more from the “capitalist” and give it to workers. He carefully ignores the fact that South Africa’s destructively high unemployment rate is due to the fact that a lot of businesses avoid hiring people because they cannot take in enough revenue to even pay that person’s wage.

The Marxist answer to this is entirely theoretical: the employer is demanding an unreasonable surplus on top of the wage. But, again, not a single Marxist in the history of that warped theory has been able to establish, with solid empirical methods, that this surplus actually exists. And they are miles away from even beginning to prove that some primitive, insatiable want for profits is keeping small businesses from expanding. Their resistance to hiring is almost always the mere fact that they cannot get enough cash flow to pay the cost of another worker.

In plain English: there is not enough total demand in the economy to create more jobs.

Another angle to this issue is the lack of entrepreneurial initiatives in the poor neighborhoods where Mr. Mahabane’s low-earning examples live. If his theory is correct, namely that (presumably white) business owners are greedy, child-eating capitalists, and that you can actually run a business much more efficiently by paying your employees the entire “surplus” on top of their wage; then why are not South Africa’s depressed, unemployed neighborhoods full of entrepreneurs proving capitalism wrong?

We assume, of course, that Mr. Mahabane, who is the “head” of the corporate communications firm Brunswick SA, has identified the “surplus” that his employees produce, and that he pays it out to them on a regular basis.

Marxism is a dangerously false paradigm. It is pure theory, at best, and has nothing to contribute to real public policy solutions. Where practiced – Cuba, North Korea, the Soviet Union and similar communist dictatorships – it has caused widespread misery and destroyed countless millions of people’s lives. The reason is simple: the theory is incompatible with reality.

Mr. Mahabane would see this if he himself would be “pragmatic and evidence-based and focus on logical consequences as opposed to ideological bent”.