Archive for income inequality

Income Inequality Did Start Around 1970

Inequality-SymbolOver at Mises Canada today I discuss whether income inequality really is increasing, or whether it is a figment of some statisticians imaginations. It’s real alright, but the cause is more obvious than anyone wants to let on/

The income and wealth divide that is now seen as a problem did start right around 1970 (depending on what type of data you want to look at to judge this, it started as early as 1968 or as late as 1973). The income divide is not fabricated, nor are these dates just pulled from thin air.

The period of time right around 1970 was unique in recent history as it was the end of the Bretton Woods era and the start of a pure fiat standard by all the central banks of the Western world. It ushered in a period of unanchored central bank credit creation, and government deficit spending. If one wants to blame something for the inequality that coincided exactly with this momentous event, why not pick the obvious reason?

Read more here.

End Central Banking, End “Unearned” Wealth Inequality

Inequality-SymbolWith all the brouhaha going around regarding income and wealth inequality, the question that is rarely asked is why inequality is something to abhor. As I wrote last November, whether inequality is a bad thing is not the right question – what matters more is your standard of living.

Imagine that you earn $40,000 a year and your boss doubles you at $80,000 a year. Business was good to you both in 2013, and you received a 25% raise for your efforts. Not bad, and your boss gets to share in this good fortune too with an extra $25,000 (about 30%). You’re going to make $50,000 in 2014 and your boss will pull in $105,000.

Are you happy with this deal? Probably. But wait, income inequality just increased! Your boss originally outpaced you by 100%, but now his salary is 110% higher than yours.

We can reverse the example and try to eradicate this new found inequality from the system:

Instead of having a great year, imagine things were very bad and salary cuts are going around. You get a 25% pay cut so that you will now be earning $30,000 a year, and because he has more responsibility about the direction of the business and its lack of success, your boss gets a larger pay cut of $25,000. (This situation is the mirror image of the first example.)

You are making much less than you did last year. Are you upset about this? Probably. But wait, apparently there is a silver lining. Your boss now “only” makes about 80% more money than you, versus the 100% salary differential that existed last year. Income inequality decreased!

Maybe all the hullabaloo over whether inequality is on the rise is an answer to the wrong question. Still, in the back of most people’s minds there exists the notion that some forms of inequality are worse than others. No one likes someone who doesn’t play by the rules, and the thought of unearned or unwarranted wealth seems to be what has people upset.

Thomas Piketty thinks that the growing divide between the haves and the have nots is caused by a lack of educational opportunities, a too low minimum wage and an insufficiently progressive income (and wealth) tax system. That could be, but I can’t fathom how the period of time that he considers the wealth divide to be growing has done so in light of the fact that the Western world has 1) more educated citizens and more opportunities for education than ever in history, 2) a minimum wage which even adjusted for inflation is quite high by historical standards, and 3) a highly progressive tax system for at least 99% of the population.

Maybe the answer is much easier. After all, his central thesis that the wealth divide has grown since the mid-1970s. This is easy to reconcile with much research that shows that income inequality has grown over this same period.

As I’ve wrote about before, the bottom 99% of income earners performed very well until 1973. That was the fateful year that the 1% surged ahead and never looked back.

What happened in the early 1970s to explain the divergence? Maybe it was the end of the Bretton Woods system, and with it any nominal restraint on the Federal Reserve (and other central banks) to inflate at will.

When Austrian economists talk about “non-neutral” money, income inequality is, in a way, illustrative of their point. New money has to enter the economy somewhere. Someone has to spend it. Those who get early access to central- and bank-created money get to spend it first. That has the effect of pushing up prices, and in the process impoverishing everyone else.

Since late 2008, the Federal Reserve increased the monetary base by over $3 trillion dollars (about a 350% increase). That’s almost $10,000 for every man, woman and child in the United States. Do you remember receiving a cheque in the mail signed by Ben Bernanke or Janet Yellen? Don’t worry, I didn’t get one either.

But someone did. The financial system serves as the intermediary between the central bank and the business and consumer communities. It distributes the money created at the whim of the central bank. It is also in a position to buy assets at the old prices with the newly issued money and in the process push their prices up so that the rest of us have to dig deeper into our pockets to make ends meet.

If you’re worried about income or wealth inequality, why not go to the most obvious source. End central banking and take the unearned advantage away from the financial sector that everyone seems to be pointing the finger at anyway.

(Originally posted at Mises Canada.)

How Fractional Reserves and Inflation Cause Economic Inequality

6753In today’s Mises Daily, we interviewed Andreas Marquart about his new book co-authored with Philipp Bagus:

MI: When caused by state intervention, what is the primary source of income inequality?

AM: The primary source is fiat money inflation and the artificial increase of the money supply by bank credit. The greater fiat money inflation is, the more unjust are the consequences. The early recipients of newly-created money are the winners. The later receivers of the new money are the losers. This is certainly true when prices are clearly increasing, but the same redistribution effect also exists when money creation takes place in a situation where prices for goods and services should be falling but are not. For example, in an economy where worker productivity is increasing, prices should be falling. But even if prices remain more or less constant, a gigantic redistribution through the money printing press may be under way as workers become more productive but see no benefit from it, thanks to inflation.

A Closer Look at Income Inequality

4Andrew Syrios writes in today’s Mises Daily: 

There are many other factors that need to be considered when discussing wealth inequality as well. For example, while the entitlement systems in the United States are embarrassingly underwater, they should be considered. According to Bankrate.com, “A male average earner who retired at age 65 in 2010 paid out $345,000 in total Social Security and Medicare taxes, but will receive $417,000 in total lifetime benefits ($464,000 for a woman).” If the government simply mandated people to have a health savings or retirement account (or better yet, let people keep their own money), that would smooth out the curve. Since payroll taxes are capped at $113,000, most of the increase would go to the lower and middle classes.

Furthermore, Norton and Ariely’s study compares households instead of individuals — a tried and true way of distorting income and wealth data. Households vary in shape and size and cannot be directly compared. As Thomas Sowell has said, “… there are 39 million people in the bottom 20 percent of households, and 64 million in the top 20 percent. So you’re saying, yes, 24 million additional people do tend to have more money.” When we further take into account that many in the bottom 20 percent are recent immigrants from poor countries, in prison, single parents, on welfare, disabled, drug addicts, etc., it becomes clear that dividing the country into such groups is simplistic at best.

Video: Joseph Salerno Discusses Income Inequality

Joe Salerno sits down with Jeff Deist to discuss how Austrian Economics frames the issue of income inequality.

Video: Hollenbeck on Income Inequality

Frank Hollenbeck discusses income inequality and central banks. This video supplements today’s Mises Daily article.

 

How Central Banks Cause Income Inequality

6653Frank Hollenbeck writes in this weekend’s Mises Daily:

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

Pope Francis, Income Inequality, Poverty, and Capitalism

Guest Post:  Pope Francis, Income Equality, Poverty, and Capitalism  

By Nicolás Cachanosky

The criticisms of free markets in Pope Francis’s Apostolic Exhortation Evangelii Gaudium (“The Joy of the Gospel”) have generated strong reactions around the world. One example is a recent post by Gregory Mankiw on his blog with brief but interesting reflections. Special attention was paid to the passage where the document criticizes the “trickle-down theories, which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.” (p. 46).

First we must recognize that there may be possible semantic nuances that can lead to inaccurate interpretations because Evangelii Gaudiium is not an economic document and, certainly, the “prevailing economic system” is not exactly a blueprint for free market economies. However, the criticism of free markets is clear and presents a difficult challenge to suggest that the document does not refer, indeed, to free markets after arguing for “semantic nuances.” Secondly, I agree with Mankiw that “trickle-down” is not a technical term, much less a theory, and is a derogatory word used by the left and other groups critical of free markets. By using this phrase, the Pope inserts a negative bias against the free market; a neutral term would been a better choice of words. The terminological slip on economic issues in the document (an example of many) suggests the need for caution regarding the strong claims that the document puts forward on economic issues. Categorical statements in a document of this importance should be better supported and articulated. Imagine an economic document critical of the Church with a clear superficial use of the language of the discipline being criticized accompanied by adjectives such as “crude and naive.” Using imprecise definitions can make us see non-existent problems. Third, the effect produced by the Evangelii Gaudium on public opinion invites us to review some general indicators of social and economic welfare in countries that are more and less inclined to free markets. Is it true that the free market leaves the homeless and marginalized the less wealthy? How much truth and how much myth is in the so-widespread criticism of “evil capitalism”? What Pope Francis expresses is ultimately a reflection of a widespread belief across a number of sectors in most countries around the world.

It is easy to get an overview of the economic and social situation of more and less free market countries if we group them into four categories according to their economic freedom. This allows a gradient of results and to observe differences between more and less free countries. It is important to note that the data of all countries must be observed, and not chosen, for example, from only a few (more details here). This would allow both an advocate and a critic of free market to choose a couple of countries at their convenience. Is the entire sample, not ad hoc selection, what should be used as reference. Let us consider, then, some economic and social data from countries around the world according to their economic freedom.

The following graphs show the GDP per capita (PPP) [i.e. adjusted for cost of living] and the average 10-year growth rate for four groups of countries according to their economic freedom. As the graphs show, on average, the freest countries are not only richer, but also grow faster in the long run.

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