| This question came up at lunch with my wife. We were talking about the redistribution of wealth, and she wondered aloud what would happen if someone were to give every American $1 million. I'm not sure if there is even that amount of money available in the entire economy, but if it were possible, I figured that a few would save it, a few would pay off debt, but the vast majority would go on a spending spree. With the median salary being $50,000, that is enough money for most people to quit their jobs for the next 20 years, at least in theory. Then, they would have plenty of time to spend their newfound wealth acquiring things. However, with so much money floating around in the economy, inflation would get out of control, so prices would rise to consume that money as fast as people could spend it. At the same time, salaries would have to rise because with everyone having, in effect, FU money, no one would want to do most jobs unless they paid very well or provided some other sense of satisfaction (I can't picture janitors or dishwashers wanting to work if they didn't have to). Eventually, however, with inflation having eaten up most of the value of all that easy money, people would have to go back to work (even at the higher salaries) to pay for everything (at the higher prices). I think in the end, after a period of chaos, we'd be back where we started. How do you think things would play out? |
Money is just an information-carrying mechanism. A lot of people fetishize it because they see the immediate effect of "If I had money, I could buy things." Ultimately, though, the economy is built on goods and services: if nobody produces those goods and services, then nobody will be able to buy them. Giving everyone money doesn't change this, it just changes the measuring stick.
The same dynamic plays out with demographics and retirement. If you have a smaller fraction of the population producing things, then standards of living will necessarily fall (barring productivity increases), regardless of what sort of financial trickery you use to redistribute wealth. Social security, individual retirement accounts, pensions - it all doesn't matter. If you replace social security with investment-based IRAs, then you'll just see steadily rising asset prices as a demographic bulge goes through working age, and then steadily falling asset prices as that demographic bulge retires. The relevant factors are the fraction of the population working at any one time, and their productivity rates. If you can't change these, you can't change standard of living.