As we observe the “Occupy” phenomenon, the issue of income inequality has become a national debate.
Other than alienating some progressive notion of fairness, I have not heard a cogent argument as to how the condition of income inequality negatively affects our economy. Yet many believe that, by addressing the symptom, we will solve the underlying economic malady. Free-market theory would instead suggest that income inequality is the result of economic bust periods and an expected part of the normal boom-bust cycle.
During difficult economic times the rich will disproportionately be able to protect their wealth because they have the means and because they steer the wheels of industry. To keep profits high they can downsize, reduce wages, and eliminate capital purchases or investments in new technologies. As uncomfortable as this might be to some, this is just “business,” not evil. Profits are why they risked their wealth in the first place.
Conversely, during boom times, as competition for labor intensifies, the wealthy, via their companies, will offer higher wages and equity positions to more people and will also invest in growth via myriad other purchases. During these periods the lower and middle classes will gain more proportionately from the fruits of industry.
If not income inequality, what then was the cause of the recent recession? While the occupiers claim that it was the failure of capitalism, I would contend that the real problem was the monkey wrench of big government within the gears of capitalism, motivated by the false notion that the government should legislate fair outcomes.
Think about it. What were the three major industries that failed? Housing, banking/ finance and auto: three of the most heavily regulated industries in America.
As for the “1 percent,” or millionaires, a recent Cato Institute survey found that 80 percent of them are first-generation rich, meaning they didn’t have it handed down from their families. Today, that same 1 percent pays about 37 percent of all federal income taxes, while earning just 16 percent of all income. Isn’t this inequality?
Interestingly, the nonpartisan Tax Foundation found that since 2007, there has been a 39 percent decline in the number of millionaires, and that the top 1 percent earned 20 percent of all income just a few years ago.
Our nation was originally formed with the principle that citizens are equal in the eyes of the law. Later we justly added equality with regard to freedom and voting. Absolutely nothing was said about equal outcomes.
In the 1990s, concerns were raised about housing-market inequalities. So, for politically created “fairness” reasons, the government required mortgages be granted to individuals who had not yet earned the privilege of being able to pay for a house. The resulting housing bubble and the current wreckage in the housing market is a predictable outcome of that government interference.
This self-induced housing wound bled into the financial markets in the form of mortgage derivatives, a futile and destructive attempt to make profits from the nonprofitable mortgage practices the government mandated upon the market. Making matters even worse, because of their connections to government, the banks and financial institutions knew that they would be bailed out by the taxpayers; so they took even more reckless risks.
Taxpayer-funded bailouts are yet another form of government interference and are not part of the capitalist system. The “risk-reward” and the “never too big to fail” principles were violated, … and we are paying for it today.
This unintended chain-reaction of harmful events in the housing market was caused by well-intended, yet imprudent, government intervention in the name of fairness.
But if interference in the housing market was bad for America, imagine what the unintended consequences will be to the business sector if government intervenes with the basic incentives of our nation’s entire economic system!
Capitalism is not a dirty word. In fact, we need more of it, via less government intervention. This is what will naturally reduce income inequalities and lead to growth in our economy. Attempting to solve income inequality through government intervention should not occupy any measure of our public-policy planning. •
Mike Stenhouse is CEO of the Rhode Island Center for Freedom and Prosperity, a public-policy think tank.
