Redistribution: Does It Work? | Cash Course | PragerU

We all have different skills. Some can sing really well. Some are skilled at math. But having one skill sometimes means not having another. Skills aren't distributed equally. Yep, it's unavoidable. From the freest economy on Earth to the most controlled and restricted, income inequality is everywhere. There will always be a mix of people with a lot of wealth, some with a little bit, and some with, well, not that much. This spread in a whole population is called the distribution of income. Any distribution of income comes with inequality, and many governments see this as a huge problem. Some try to close the gap between rich and poor and smooth out that distribution with policies to redistribute wealth. The most common way to measure income inequality involves plotting a Lorenz curve. I know, I know. That's a graph that shows how much wealth is owned by what portion of the population. A straight 45-degree line means that wealth is equally distributed. Then you plot the wealth distribution of a country, throw in a little calculus, and voila! You get a number between 1 and 0. What are you talking about? Uh, don't worry about it. What's important is that number between 1 and 0, called the Gini coefficient. 0 means complete equality, and 1 means complete inequality, where one person owns everything. The U.S. sits in the middle of that spectrum with 0.42. Hi there. I'm from the government, and I'm here to help. This help mainly involves collecting taxes from higher earners to fund programs that usually consist of transfer payments, transactions where one group gives money or services to another group, but receives nothing in return. Programs aimed at helping people with lower incomes buy groceries, health care, or basic everyday needs are all transfer payments. See, I told you the government was here to help. Those who support redistributing income to address inequality claim it has potential upsides. They argue that taxing high earners more and using that revenue to fund transfer payments will help those in financial trouble. They also claim redistribution will prevent the social unrest that might happen when wealth appears to be concentrated in one small group. These arguments assume that empowering the government to redistribute wealth is an overall positive. I mean, what can't the government do? Am I right? Unfortunately, government redistribution comes at a high cost, and it rarely changes the distribution of income in any lasting way. Unlike the fast-moving market where buyers and sellers deal directly with each other, transfer payments require going through a third party, usually the government, and the government tends to be slower, more wasteful, and less efficient. Yeah, I'll get right on that. The real downside, however, is that redistribution disincentivizes work. If people know they'll receive money regardless of how hard they work, or even if they don't work at all, they won't be motivated to improve or be more productive. And with no extra rewards for hard work, fewer people will put in the time and effort to be surgeons, singers, or mathematicians in the first place. History also shows that raising taxes for redistribution programs risks wealthy individuals taking their productive capital elsewhere. If enough of them leave, an economy could suffer, losing important resources for everyone, and leaving even less wealth to distribute. Finally, many people think it's plain unfair of governments to take money from one group and give it to another. Just as income inequality can lead to social unrest, heavy redistribution policies can trigger envy, division, and even, well, social unrest. Why did you get money? Because I'm special. I can do math. You produce useless research. Oh, like singing is so useful? Countries handle income inequality differently. For example, Sweden and Denmark blend a free market with high taxes for a strong social safety net. In contrast, the U.S. has relatively lower redistribution, lower taxes, and greater income differences, but offers higher social mobility. Millions move here yearly to work hard and advance based on personal choices. Learning new skills, taking tough jobs, and seeking opportunities can significantly increase income over time. Two times six is twelve. Two times seven, fourteen. Yeah. Then there are command economies with their promises of equality. That might sound enticing, but everywhere this kind of redistribution has been tried, it concentrated wealth in the hands of a few people with government connections and left everyone equally dirt poor. Inequality is a fact of life. Any economy will always have people who are much wealthier than others. Government may attempt to flatten inequality by redistribution, but in reality, those attempts tend to be expensive, inefficient, and cause all sorts of social problems. Whatever the government's doing, or not doing, it's important to understand the cause and effect of wealth redistribution on your country, your community, and you. Brilliant! Watch more at PragerUKids.com And parents, don't forget to subscribe.