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I've seen a video on wealth distribution on the US where perceived, "desired"(by the majority) and actual income distributions are shown. I've been thinking what would happen to the purchasing power if such a distribution was attained. How much could the supply increase to balance the huge amounts of money that were just being invested and accumulated and will now be spent on consumer goods? If an inflation would occur, is it possible to estimate it?

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Inflation is only inflation if supply can't keep up, and if the money supply increases without growing the economy.

Massive wealth distribution (edit: on a long time scale) would be a huge boost to the economy. Why? All the purchases of consumer goods will increase production of all those goods, which will move through the entire economy causing expansion. Of course there will likely be some inflationary effects but as long as the wealth distribution didn't happen overnight whatever mechanism of distribution is probably going to redistribute slower than what the economy can handle anyway.

If you wanted to estimate potential inflationary effects you'd have to figure out the stickiness of production schedules of a basket of consumer goods that the poor would be likely to buy compared to the speed of redistribution.

Also, it's worth pointing out that a lot of money in equity is 'virtual money'. It doesn't actually exist (or rather, it exists, as long as you don't use too much of it at once). What I mean is, if for example Bill Gates wanted to liquidate half his stock, he would sell the stock at a massive loss to the current market rate and would get a lot less than you would think. The same applies to sales of any equity or land... In theory those assets have the value on paper but you can't just redistribute that form of wealth, it would end up destroying the paper wealth since the buyers wouldn't be able to afford it, and would require the seller to sell at a 'loss'... Forced distribution on a short timescale of large amounts of wealth would result in that wealth being destroyed without any real advantage, because the wealth isn't in actual money. So you could also argue that there would be some deflationary effects due to wealth distribution too!

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    $\begingroup$ It's not clear, as you might suggest, that wealth distribution would boost the economy. As you have mentioned, a lot of money is in stock and in other investment. True, poorer people have a higher propensity to consume. On the flip side, wealthier people are more likely to save. Lowering savings would lower the steady-state level of capital and thus lower output in the long-run. You need to consider these kinds of effects. $\endgroup$ – jmbejara Apr 22 '15 at 15:09
  • $\begingroup$ @jmbejara in general it's true that if lowering savings caused a loss in capital investment that there would be knock-on effects on the economy. However, considering the state of the economy right now, there are huge amounts of savings that are not being put to productive uses, it's not 'savings' in a economical sense, if that makes sense. It is with that in mind that I wrote that it will have a net positive effect on the economy. $\endgroup$ – serakfalcon Apr 22 '15 at 15:13
  • $\begingroup$ "there are huge amounts of savings that are not being put to productive uses" How are you sure that this is the case? Do you have any evidence of this? $\endgroup$ – jmbejara Apr 22 '15 at 15:27
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    $\begingroup$ @jmbejara precautionary savings are inefficient. $\endgroup$ – FooBar Apr 23 '15 at 14:00
  • $\begingroup$ @serakfalcon, your answer seems to assume that aggregate output is largely demand-driven even in the long run. This is not a popular view among economists, even ones (like me) who believe that there can be large short-run effects from demand. You'll have to work to convince us - for instance, if you did a Solow-style decomposition of your predicted expansion, would most of the growth come from total factor productivity, capital, or labor? $\endgroup$ – nominally rigid May 3 '15 at 0:31
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Massive wealth distribution would be a huge boost to the economy. Why? All the purchases of consumer goods will increase production of all those goods, which will move through the entire economy causing expansion. Of course there will likely be some inflationary effects but as long as the wealth distribution didn't happen overnight whatever mechanism of distribution is probably going to redistribute slower than what the economy can handle anyway.

This is over looking the fact that much of the wealth is invested in companies who hire people. As an example, if 90% of Warren Buffett's wealth was in Berkshire, and he had to liquidate to re-distribute his wealth, that would have an affect on the economy, some inflationary, some deflationary. But it would also cause some people to lose their jobs; that money invested is providing jobs - it's lending to a business, which in turn hires people, buys resources, etc.

Massive wealth distribution would be a huge boost to the economy. Why?

So when they confiscated land from the land owners in Zimbabwe, why wasn't there a HUGE boost to the economy? Again, this would be like confiscating Steve Jobs' wealth (a lot of which was in Apple) when he was alive and redistributing it, thinking that the overall effect will be good, when what you've really done is stifle innovation.

A good example of wealth redistribution is Zimbabwe. As you can read, it turned out very well! Another good example is the Soviet Union - there has never been a more equal society as far as wealth (excluding bureaucrats, of course). 300% inflation and many people starved to death. If wealth is a product of skill, redistributing wealth may discourage skill; and in the long run, it won't be pretty. At least the two examples I provided show some pretty significant inflation.

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  • $\begingroup$ I think you meant this as a comment on my answer. Firstly, the value of the stock (and of any equity, really) of Berkshire Hatheway has no effect on the underlying company unless staff performance bonuses have been tied to equity measures. Really, the stock market is small compared to the overall economy and it gets more attention than it deserves. A lot of the money could be taken out of the stock market and put to more productive uses. $\endgroup$ – serakfalcon Apr 22 '15 at 1:45
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    $\begingroup$ I agree with you that land seizures are problematic. However, I would argue the biggest problem with quick seizures of property, is not necessarily the seizures themselves, but what the seizures represent: that it's no longer safe to store your wealth in x country or x place, which is going to lead to a lot of capital flight. The Soviet Union is a special case because they thought a centralized government controlling everything was a good idea. The biggest important thing for wealth distribution is the timescale in which it happens: Obviously it needs to be orderly. $\endgroup$ – serakfalcon Apr 22 '15 at 1:48
  • $\begingroup$ I'm thinking of wealth distribution on the scale of one to two generations, not overnight. $\endgroup$ – serakfalcon Apr 22 '15 at 1:48

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