What “Experts” Miss about Economic Inequality

Last update October 10, 2020

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Bradley Thomas October 10, 2020 SNB & CHF

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That’s a question USA Today posed to three “policy experts on the left and the right” in this recent article. The responses, while unsurprising, were nevertheless disappointing. For libertarians, economic inequality itself is not problematic, as long as it is in the context of an unfettered market economy free of government privileges and interference. Of course, that’s not what we have. But instead of advocating for a more free economy to address inequality, the “experts” consulted by USA Today advocate for more state interference that would likely make inequality worse while ignoring perhaps the largest source of inequality, the Federal Reserve. First up is Scott Winship of the American Enterprise Institute, who focuses on income mobility. Winship points out

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That’s a question USA Today posed to three “policy experts on the left and the right” in this recent article. The responses, while unsurprising, were nevertheless disappointing.

For libertarians, economic inequality itself is not problematic, as long as it is in the context of an unfettered market economy free of government privileges and interference.

Of course, that’s not what we have. But instead of advocating for a more free economy to address inequality, the “experts” consulted by USA Today advocate for more state interference that would likely make inequality worse while ignoring perhaps the largest source of inequality, the Federal Reserve.

First up is Scott Winship of the American Enterprise Institute, who focuses on income mobility. Winship points out that if every child had equal economic opportunity, then we would see an equal percentage among races of children remaining in the bottom fifth of income when they become adults.

Winship notes that roughly 30 percent of white children remain in the bottom fifth in adulthood, while the figure for black children exceeds 50 percent.

Absent from Winship’s observation, however, is the recognition of why this might be the case.

According to Pew Research, 30 percent of single mothers and their families are living in poverty compared to 8 percent of married couples and families. In other words, children are nearly four times as likely to be living in poverty in a single mother household compared to a household headed by a married couple. Meanwhile, 58 percent of black children are living with an unmarried parent, compared to 24 percent of white children and just 13 percent of Asian children.

Moreover, the welfare state has facilitated a dramatic rise in single parent homes. Nationally, since LBJ’s Great Society ratcheted up government welfare programs in the mid-1960s, the rate of unmarried births has tripled.

Single parenthood fueled by the welfare state is an outsized source of inequality, but the welfare state escapes any blame by the “expert” Winship.

To his credit, Winship in his recommendations mentions in passing that “shoring up marriage where it has become an anomaly” would help reduce inequality, but he fails to target the welfare state as the major culprit.

His other recommendations include the vague notion of “expanding access to high opportunity neighborhoods,” perhaps a nod to government programs to inject affordable housing projects into middle-class suburbs, along with increased government spending on early childhood programs. Encouraging more state involvement in child-rearing while ignoring the glaring problem of single parenthood caused in large part by the welfare state sounds like a recipe to exacerbate inequality, not combat it.

Next up is American Compass research director Wells King, who blames growing economic inequality on the fact that the “labor movement has lost power.”

King overlooks basic economic analysis while giving labor unions undeserving credit for boosting worker wages on a broad scale. As Henry Hazlitt wrote, “the blunt truth is that labor unions cannot raise the real wages of all workers.”

As Hazlitt explained, “whenever the unions gain higher wage rates for their own members than free competition would have brought, they can do this only by increasing unemployment” in that industry, because the above market wage rates decrease employer demand.

As a result, more workers are forced to compete for other nonunionized jobs, and the increased supply of workers in other industries drives down those wages. Therefore, Hazlitt concludes, “All union ‘gains’ (i.e., wage rates above what a competitive free market would have brought) are at the expense of lower wages than otherwise for at least some if not most nonunion workers. The unions cannot raise the average level of real wages; they can at best distort it.”

As Hazlitt shows, King’s calls for a more robust union movement as a means to reduce economic inequality are ill founded.

Moreover, King’s blinkered focus on unions as a force for growing worker wages blinds him to a far more potent force driving inequality.

“The steady erosion of unions over the past 50 years has been responsible” for growing inequality, King insists while noting a correlation between declining union membership and growing wealth inequality during that time.

But what else happened fifty years ago that might have influenced wealth inequality?

Of course it was Nixon’s severing the final ties of the dollar to gold in 1971, which has enabled the Federal Reserve to create fiat money completely unchecked. As demonstrated in multiple charts at the website WTFhappenedin1971, there is a clear divergence in incomes between high and low earners beginning sharply in 1971.

According to this 2018 mises.org article, the base (M1) money supply ballooned by an incredible seventeen times, with more than $3.2 trillion being created from 1971 to 2018. And it’s only getting worse, with another 33 percent increase in the first seven months of 2020 alone.

Why does Fed money printing increase economic inequality?

In short, the rich receive a significant share of their income from investments, while the middle class primarily rely on their income from labor and the poor a combination of labor income and government welfare payments.

When the Fed creates new fiat money out of thin air, it isn’t distributed evenly throughout the economy. Instead, it is inserted at specific points, typically via credit to business investors. As the Fed inflates a bubble, speculation with the new money also increases—which inflates the stock market, benefiting the investor class.

Meanwhile, the fiat money creation causes price inflation that permeates over time throughout the economy. Some of the more highly skilled in the middle class may receive salary increases to keep up with the inflation while many of the lower-skilled middle class will struggle to keep up with rising prices. The poor, who lack the bargaining power to raise their wages to keep pace with inflation, and otherwise rely on relatively fixed incomes, fall further behind.

The failure of King to recognize the Fed’s major role in growing inequality undercuts any credibility his recommendations should be given.

Last is Economic Policy Institute research director Josh Bevins, who incredibly calls for more money printing to help reduce economic inequality.

“Policymakers should re-target genuine full employment (the Fed is making good steps in this direction),” Bevins declares. How this supposed “expert” believes more asset bubble–inflating money creation will reduce economic inequality goes without explanation.

Bevins further calls for a “substantially increased” federal minimum wage, without acknowledging that pricing low-skilled workers out of the workforce and eliminating the first rung on their career ladders will reduce the ability of low-income people to increase their earning power and narrow economic inequality.

More generous unemployment benefits is another of Bevins’s recommendations. But increasing the incentive to not work will result in more people, especially those already on the margins of employment, staying out of the workforce for longer periods of time—a great recipe to stymie the steady career track needed to climb out of low-income status.

How disappointing that a national publication like USA Today can do no better than “experts” who recommend government interventions that would end up increasing rather than shrinking economic inequality.

First published by the Libertarian Institute.