Understanding the Distribution of Wealth: Is Economic Opportunity Enough?

Imagine a scenario where a man brings his car to a mechanic because it's running slower and less efficiently than it used to. The mechanic, however, has a unique solution:

The Unconventional Mechanic

"I’ve got just the thing, bring it in tomorrow and I will put in a new fuel line and a new pump to deliver twice the gasoline to the engine,“ the mechanic says with a cheery grin, while you're eyeing him with suspicion. He may even offer, 'Actually, I am a supply-side economist—just do this on the weekends for extra money.'

This analogy is a playful yet apt illustration of how certain economic policies and philosophies operate. The man's car, much like an economy, needs a balanced flow of resources, not just increased production. The rare 'ingredient,' just like the critical amount of gasoline, is consumption. Without consumption, production alone isn't sufficient.

The Mechanics of Economic Growth

Let's delve into the mechanics of an economy. At a fundamental level, an economy can be compared to a series of chemical reactions. Just as a chemical reaction requires a specific amount of reactants to proceed, an economy requires a balance of production and consumption. When production far outweighs consumption, it leads to an inefficient economy, much like a car running on an excess of fuel but lacking other essential components.

Supply-Side Economics: A Historical Misconception

Supply-side economics, while popular in certain circles, often focuses excessively on production as the sole driver of economic growth. This perspective ignores the fundamental role of consumption. As Greg Mankiw, chairman of the Economics Department at Harvard, has repeatedly argued, increasing efficiency in production is crucial. Yet, this argument can be flawed, as it assumes that all produced goods will find a market. Even at Harvard, where many are proponents of supply-side economics, the illusion persists that production in itself is the primary driver of growth.

The Role of Trickle-Down Economics

There is a conceptual buffer known as the 'trickle-down effect.' When investors pour funds into assets such as stocks, real estate, and bonds, profits can be redistributed to middle-class citizens, enhancing their consumption capability. However, this effect is merely a buffer and does not fundamentally alter the economic direction. For instance, if you spend money from your house equity, the eventual devaluation of your house will offset the initial boost in consumption, leading to a negative spending delta. Similarly, spending on stocks requires you to buy them back to participate in future asset price increases, creating a cyclical burden.

The Critical Ingredient in Economic Growth

In any chemical reaction, the rarest ingredient determines the reaction's rate. Similarly, in economies, the critical factor can be scarcity. In right-leaning countries like the USA, providing a new source of income to the bottom 90 percent, such as a universal basic income (UBI), can significantly enhance economic growth. Conversely, in societies with more equitable income distribution, production capabilities might become the limiting factor. If we are in the post-singularity era, as some futurists speculate, the dynamics of economic growth might radically change, requiring a reevaluation of established economic theories.

Whether we are in a highly skewed or more equitable economic landscape, the key takeaway is the importance of balancing production and consumption. Without economic growth that includes a strong consumption component, the production-oriented policies can lead to a wasteful environment, much like attempting to run a car on an excess of fuel without the proper mechanism to deliver it efficiently.