Saturday, April 12, 2008

Zero Sum Games

There's an interesting little concept in economics called a Zero Sum Game. To give a simplistic example, consider two people, each with $5, for a total of $10 in the economy. Now take $2 from one guy and give it to the other. This redistribution leaves one person with $7 and the other with $3. The total is still $10. This is a zero sum game because the total sum of their interactions is, well, zero. ($2 to person 1 - $2 from person 2 = $0 net change.) Easy enough? The basic idea is pretty simple.

It hit me the other day, while pondering on a discussion I had with a colleague about welfare, that perhaps one of the big reasons that there is a debate on how to handle social aid policies can be explained through this concept. That is, I think some people look at welfare and tax issues as if it is a zero sum game. Again, to be abstract, this perspective would interpret an economy as 1 rich guy with all the money, say $10, and one poor guy with nothing. Suppose also that in order to live at an average standard of living, one would need $5. Since we have a moral obligation to care for our poor, a good intentioned person may look at this situation and say we need to tax the rich guy and give a welfare check to the poor one. Take $5 from the rich guy, give it to the poor guy, and we no longer have an income gap and both can live at a decent standard. Problem solved.

But here's why I don't like that: I don't think this is a zero sum game. See, the guy with the $10 probably earned that through his job. Maybe he's a CEO and his job involved playing golf all the time, but no matter, he has a job that paid it to him. Now, in order to get that $10, presumably his company has to provide a service that people pay for. If you take $5 from him, that's $5 he doesn't have to use to expand his company. His company's growth is stunted and so he backs off on production. Instead of making $10 worth of stuff, maybe he only makes $9 now. After taxes he gets $4 and the poor guy gets $5. Total in the economy: $9. Wait, where did the other dollar go? Oh ya, the CEO shrunk his business. So it's not a zero sum game. Taxes distort profits and discourage production. The result is less stuff built, less money made, and an overall drop in average wages.

It works the other way too. See, CEO's are selfish jerks. They don't care about the little guy... just their own bottom line. And without taxes, there is incentive to earn money (since you get to keep it and don't have to just give it to the government). So in all his selfishness, the CEO expands his company and tries to produce more stuff. That means he needs to hire someone to do that. So he hired the guy without a job, and pays him say, $5. The poor guy gets his $5 and the rich guy gets, well, richer than before. Or better yet, maybe the poor guy says "Hey! The government doesn't tax profits! Awesome! I'm gonna start my own business!" He does, becomes a greedy CEO himself, and lives the American Dream.

Okay, I know this is a baked example, but here's the point: Taxes and welfare is not a zero sum game. By not taxing, we encourage entrepreneurship which creates more jobs for those that don't have them. Welfare generally depress this effect and in fact encourages the poor guy to stay poor. Why work if the government will give you stuff for not working? Traditional handout based welfare programs create dependency on the system and don't teach self-responsibility. In fact, it's fundamentally discriminatory against poor people because it's based on a philosophy that says, "You're poor and uneducated and so you don't have the ability to care for yourself so we'll do it for you." I respectfully disagree. We should encourage business and alleviate tax burdens so CEOs can be more competitive, plow money into R&D, and keep our economy alive and strong. Taxes to fund welfare programs is a downward spiral that may help in the immediate present, but in the long run will make rich people poorer while not making the poor people any more rich. Don't believe me? Look at our existing programs: Social Security, Medicare, etc.... all of which are just about ready to go bankrupt and implode.

Now, I'm not done just yet. I do support some taxes and even some welfare. There are three welfare programs I would like to see replace our current ones:
  • Improve public education and keep it free for everyone. Don't have a job? Get an education (for free) and the go get a job.
  • Additional job training and search services. Need money to support your family? We won't write you a check, but we will find you a job so you can earn that money on your own two feet. And we'll help you find that job for free.
  • Emergency medical assistance. If you don't have money and get hit by a bus, we'll still treat you and the government will pick up the check. And even send the tax bill to the evil CEOs. How very... liberal of me... ;-)
I just keep getting angry when I hear people talk about evil corporate conservatives who don't care about helping the poor. My heart breaks when I see people who are less fortunate than myself. I want to help them. As I'm able, I do help them. But that's personal. On a federal level, I guess I just want to see society helping people help themselves, instead of just helping people scrape by. Socialized welfare programs are 100% fine with me if they are based on the self-help principle, not on the government-help principle.

SM

Edit: I swear, next time I'll find a new topic instead of harping on this same one over and over.