Maybe Those Rich People Actually Serve A Purpose

The cause of the moment on the Left is income inequality.  The rich must be vilified, and their wealth redistributed!  Different countries follow different prescriptions to achieve the goal.  In Venezuela they have mostly just driven the rich out of the country.  In France they have the tax on the "great fortunes" (a "grande fortune" being defined as 1.3 million euros, equivalent to approximately 3 CSUs or Clinton Speech Units).  In the UK, prospective new Labor Party leader Jeremy Corbyn has proposed bringing back the clause in the party's platform that calls for public ownership of "industry."   That one could have prevented even Warren Buffet from getting rich if only we'd had it in the U.S. at the right time.  After all, it's letting people own businesses that enables some of them to get rich.  Public ownership would be so much more fair.  Or as the next best alternative we could make it so that businesses can only offer such products, and at such prices, as the government allows (e.g., Obamacare).

And then along comes one of those great market downdrafts.  The price of oil has declined by more than half over the course of the past year, and may be staying at this new lower level for a long time.  The Chinese stock markets have fallen by some 40% since peaking in June 2015.  Other world stock markets have had steep but less severe drops, including a drop in the major U.S. market indices of over 10% over just a few days (although some of that has now been recovered).

So how do these events play out in countries following different economic approaches?    

In the U.S., it's simple:  lots of rich people have lost lots of money.  On Saturday August 22 Bloomberg News, using data from the Bloomberg Billionaires Index, reported that the world's 400 richest people had lost some $182 billion of wealth in the market downturn just that week.  Then on Monday August 24 they reported that the same people had just lost another $142 billion.   Well, nobody feels too sorry for them, nor should anybody feel sorry for them.  That was the deal.  We let them keep the upside, but in return they had to take the downside (or find somebody to sell to who would take the downside).  In the oil patch things are even worse for the J.R. Ewings of the world.  There's talk of many bankruptcies coming among recently-high-flying drillers and producers of crude.  Lots of people who were multi-millionaires a few months ago are getting wiped out.  Again, nobody should feel sorry for them.  

And how about the poor?  By definition, they don't own any meaningful amount of these assets that just declined in value.  They won't even notice that the downturn has occurred.  And the U.S. government?  Somewhere it will take a small hit in capital gains and oil taxes, but those are a very small part of its revenue.  Basically, it won't even notice either.

China?  Some of their billionaires are in that Bloomberg 400, and they have borne a portion of the declines.  But lots more has been borne by the state -- which means by everybody, even the poor.  There's the $483 billion that the Chinese state put up just in mid-July to prop up the stock market, over 5% of a year's GDP.  That's money that came from everybody, not just the rich.  Guess that didn't work out too well.  And then there's the immense overcapacity and overbuilding that has gone on in China, in industries from steel to consumer goods to real estate.  Ghost cities, anyone?  These things are the result of the state allocating and subsidizing credit to cronies to keep doing what has seemed so successful in the past, even after it is not any more.  Again, the whole of society is on the hook for the disaster, not just the rich.

Or take the far more extreme case of Venezuela.  When oil prices were over $100 a barrel, it seemed like such a good idea to have the state own the entire oil industry to collect the free money for the good of all of society.  Now the state itself is getting wiped out, and the people, down to the poorest, are losing everything they have saved in the country.  The government has stopped putting out GDP or inflation statistics, but a fair estimate is that GDP will decline by 30% or so this year.  They've taken to printing currency to pay the government's bills, and we all know where that ends.  Recently the largest bill they have has gotten to be worth only 14 cents at the black market (real) exchange rate, so it takes baskets of bills to buy anything.  But they have a solution:  they'll start printing bills in larger denominations!  That'll work for maybe a couple of months.

Meanwhile, as tough as things are in the oil business these days, somehow the sharpest entrepreneurs keep innovating at a breakneck pace to keep making money at lower and lower prices.  From Donald Luskin and Michael Warren in the Wall Street Journal on May 15, "The Shale Boom Shifts Into Higher Gear":

The nimblest and smartest competitors have worked relentlessly to increase their productivity. Leading-edge operators report that they can produce more profitably today at a price of $65 a barrel than they could at $95 a barrel three years ago. Where can they be profitable three years hence—$40 a barrel? $30? The oil patch today is afire with the same technological imperative and competitive mission that has powered the U.S. electronics revolution—think Moore’s Law—to dash headlong down the learning curve, crushing costs and prices and making up for it in volume.

Or then there's the oil business in the state ownership model in Venezuela.  From Mery Mogollon in Platt's, July 1:

Although officially the Venezuelan government says its production is around 3 million b/d, secondary sources and publications estimate a volume of 2.3 million b/d, compared to 3.5 million/b in 2008, one year after Chavez expropriated the oil fields owned by international companies and ushered in reforms. This was also the time when an exodus of engineers and other white collar workers began from PDVSA.  In addition to oil production, the human resources problem has impacted refineries at a time when Venezuela, formerly a net exporter, now needs to import oil products to meet domestic demand.

Somehow in socialism there is no longer an upside, only a downside, and the poor and middle class own it.         

UPDATE August 30:  I spotted this August 10 article in the Mail Online, pointing out that the richest person left in Venezuela is currently thought to be -- Maria Gabriela Chavez, daughter of deceased former strongman Hugo Chavez.  The Mail gives her wealth as $4.2 billion, held in banks in the United States and Andorra.  For its source, the Mail cites Miami-based El Diaro, which in turn cites "Venezuelan media sources."  I guess such rich as they still have in Venezuela are sufficiently well-connected to be insulated from the downside risk of the economy's collapse.  Then there's this quote from Chavez: "Being rich is bad."  For everyone but himself and his family and cronies.