Reparations

What does the Mansa Musa pilgrimage and winning the lottery have in common?

In the year 1324, Mansa Musa I, the tenth Mansa (emperor) of the Mali Empire in West Africa made a pilgrimage to Mecca. The African king was one of the wealthiest monarchs of his time. While traveling across the continent, he and his entourage showered gold upon local communities. In Cairo, Mansa Musa gave away so much gold, that it crashed the local economy. The influx of money disrupted the supply-demand balance and led to inflation as prices surged due to the sudden increase in wealth. Quite simply, there was too much gold chasing too few goods, thus massive inflation negated the benefit of the spend. What seemed like a benevolent gesture hurt more people than it helped. Especially, if one needed to buy bread in the marketplace and missed the gold-raining caravan.  

On a separate train of thought, what happens to people who win the lottery? Does picking the winning numbers create long-term wealth for the lucky winners? The results don’t look good. A frequently cited study, conducted by the National Endowment for Financial Education (NEFE) in the United States, found that around 70% of lottery winners go bankrupt within a few years of receiving their windfall. Another study conducted by researchers at the University of Kentucky found that 29% of lottery winners surveyed ended up in financial distress, and a separate study from the Swedish National Institute for Working Life suggested that lottery winners were more likely to file for bankruptcy than non-winners.

Why doesn’t giving money away create long-term wealth? We don’t need to just look at Mansa Musa or lottery winners to learn this lesson. Second and third generations of mega wealth creators rarely surpass their parents or grandparents in wealth accumulation. When talking about the continuation of wealth in legacy families, the phase, “shirt sleeves to shirt sleeves in three generations.” Comes to mind. As it turns out, not having a connection to the work required to acquire wealth generally doesn’t translate to continued wealth accumulation. In fact, in most cases where iron-clad trusts have not been created to protect wealth for the benefit of offspring, subsequent generations usually fare about as well as the lottery winners at maintaining gifted wealth.

Based on the above history and known human financial behavior, how would California’s proposed reparations turn out any different? The Reparation Task Force has proposed a 1.2 million-dollar payout to approximately 2.5 million residents that can trace their lineage to American slavery. The reparation proposal in tantamount to the 14^th century emperor’s give-away – it is both specific and random in it gifting scheme.

How will this multi-trillion-dollar infusion into the California economy not cause the inflationary issues of Mansa Musa in the 1324? The only way I see inflation staying in check in the Golden State’s reparation quest is if the funds are truly a dollar-for-dollar exchange. For each dollar that is paid in reparation, a dollar must be taxed. If the State pays the reparation bill with debt instead on taxation, inflation is unavoidable.

Even if the California could be disciplined enough to tax this project in a revenue-neutral fashion, and the massive tax bill does not chase more taxable residents and businesses to less bat crap crazy states, how will the free money not cause the same results as lottery winners? Based on the above quoted statistics from the NEFE, we could expect that 70% or 1.75 million reparation recipients to fall on financial hard times or declare bankruptcy within a few years of receiving the windfall.

Whatever California ultimately decides, it is important to understand that reparations are not and never will be smart fiscal policy. From a financial point of view, reparation advance neither the state of California nor the individuals that are to “benefit.” The State will lose a crucial tax base due to residents fleeing the massive tax burden. With the exodus will be a loss of private businesses and their associated jobs. The shower of sudden cash on the California economy is sure to inflate costs of goods, services, and real estate. And, based on known historical financial behavior of monetary gift recipients, the reparations will not have a long-term effect on recipient class wealth.

With all the known weaknesses in the California reparation proposal, why would a State wish to travel such a destructive path? The same reason why governments are poor monitors of businesses and public services. Governments do not and never have made decisions based on sound fiscal reasons, they always make decisions based on expected political outcome. The reparation proposal is merely a political calculation, one Gavin Newsom believes will propel him to the White House. The resulting inflation, subsequent bankruptcies, and resident migrations that come from his support of reparations will be unavoidable biproducts of that political decision.

The California reparations scheme will go down in history as the world’s most expensive and ineffective legal enactment. Economics and political schools will study its effects for generations to come. Who knows, Governor Gavin Newsom may become synonymous with its failings. When future state houses debate reparations, legislators will take the stand and warn their state bodies not to pull a “Newsom.” They will point to California and illustrate how Newsom destroyed a vibrant economy all for the sake of scoring an incredibility short-term political victory. Hopefully other State legislating bodies will be more responsible and not sell their constituents out for a few political pieces of silver.