Acton Institute Powerblog

It’s that Time of Year

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Time for the annual spate of “gap between rich and poor increases” stories in the MSM. There are a number of problems with the judgmental assumptions implicit in these kinds of stories.

For example, there is a zero-sum view of wealth that pits individuals against each other. It’s essentially the “pie” view of money and wealth: if I take a piece, there’s that much less available for others. This is the distributivist economic model. This is a fundamentally flawed economic model that does not adequately account for the creation of wealth via free exchange.

But there’s an even more obvious phenomenon that makes such “news” stories so mundane. It’s been referred to as the “miracle of compounding interest.” Because of this, it should be no surprise that the gap between rich and poor continues to widen. In fact, assuming the laws of mathematics, we can say that it ought to continue to widen.

Let’s use an overly simple but instructive example. Say that person A has $1,000 in capital to invest while person B has $10,000. Relatively speaking, person A is poorer than person B, with a difference of $9,000.

If both persons invest their money, and get a return roughly equal to inflation, say 2% (compounded quarterly), in fifty years A will have $2,711.52, while person B will have $27,115.17. The gap between the two has exploded from a mere $9,000 to $24,403.65!

But is there anything fundamentally unfair about this? Change around the capital investments, the rate of return, and the time period, and you can quickly get into astronomical numbers. But why is this news? Just because there are big numbers with lots of zeroes?

Given this economic reality, it would really be news if the gap between rich and poor didn’t increase.

Jordan J. Ballor Jordan J. Ballor (Dr. theol., University of Zurich; Ph.D., Calvin Theological Seminary) is a senior research fellow and director of publishing at the Acton Institute for the Study of Religion & Liberty, where he also serves as executive editor the Journal of Markets & Morality. He is author of Get Your Hands Dirty: Essays on Christian Social Thought (and Action) (Wipf & Stock, 2013), Covenant, Causality, and Law: A Study in the Theology of Wolfgang Musculus (Vandenhoeck & Ruprecht, 2012) and Ecumenical Babel: Confusing Economic Ideology and the Church's Social Witness (Christian's Library Press, 2010), as well as editor of numerous works, including Abraham Kuyper Collected Works in Public Theology. Jordan is also associate director of the Junius Institute for Digital Reformation Research at Calvin Theological Seminary. He has authored articles in academic publications such as The Journal of Religion, Scottish Journal of Theology, Reformation & Renaissance Review, and Journal of Scholarly Publishing, and has written popular pieces for newspapers including the Detroit News, Orange County Register, and The Atlanta Journal-Constitution. In 2006, Jordan was profiled in the book, The Relevant Nation: 50 Activists, Artists And Innovators Who Are Changing The World Through Faith. Jordan's scholarly interests include Reformation studies, church-state relations, theological anthropology, social ethics, theology and economics, and research methodology. Jordan is a member of the Christian Reformed Church in North America (CRCNA), and he resides in Jenison, Michigan with his wife and three children.

Comments

  • While long term macro economics is NOT a zero sum game, in each fiscal year the US budget, like every gov’t budget, IS a zero sum game. The more the gov’t spends, the more it must take as taxes (or inflation).

    This also holds locally — the more folk spend at Wal-Mart, the less they spend at the other local shops (like Sears or K-mart or mom & pop stores).

    What is crucially important on the compound interest example is that only Investment counts towards interest. The rich usually invest more. For a majority (or near?) of Americans, their only significant investment is their house — and they’ve been taking OUT the equity to consume it. That’s not the path towards more wealth in the future.