3/18/15

The subject of income inequality is all over the headlines with Democrats and other progressives trying to blame capitalism and free markets for the fact that median salaries in the US have not risen in real terms for some time now.

In the process, they twist the facts, manipulate statistics, give half-truths, etc.

The biggest recent celebrity of the income inequality movement, the French economics professor Thomas Piketty, is now slightly recanting some of his theory according to an article in the WSJ.

Generally speaking, income inequality exists but it is far less dramatic than what progressives are trying to make it out to be. The suggestion that the “middle class” is not better off today than it was, say, 30 years ago is laughable. In EVERY element of life, health, standard of living, etc. they are better off but more important, the poor are much better off. Moreover, studies show that mobility between the “classes” is still fairly vibrant and as such the chance for someone who is born poor to make it to the middle class is pretty good. The reverse is also true—which is part of the capitalistic system. It is not necessary ideal, but it is the best there is.

To summarize the argument about inequity I would say the following:

  • The income inequality between the “rich” and middle classes is significantly less of an issue than what progressives are trying to make it to be; partially due to government transfer programs financed by a very progressive tax system.
  • The ONLY way to improve the gap is by generating robust growth. It is a well-established fact that during periods of robust growth in the economy, the gap reduces most. It is not for nothing that, under President Obama with his tepid economic recovery and weak growth, the inequality gap has grown more than in any other period in history.

There is, however, one fact that cannot be ignored. The % of USA GDP represented by corporate profits has grown to a new record and well above its average. It is now at close to 11% of GDP. There are many who claim that this is not related and has no effect on median incomes—but I dispute that.

I believe that it is very relevant. These claim focus on the increased contribution of international earnings to US corporate earnings and this, ostensibly, is not coming on the account of US workers and their wages. But it is. US corporations make money overseas because it is cheaper for them to produce overseas than in the US. That reduces the need for employees in the US. Reduced demand results in reduced price for the product even when the product is hourly work.

The questions to ask are: Why has that been the case? Why are corporate profits so high as a % of the GDP? And how can we change it?

Some will tell you that it is technology; some that it is the globalization trends but they are all incorrect. There is one word that explains it all—COMPETITION. Or, rather, lack thereof.

It is obvious that corporations are achieving such high level of profitability because there is not enough competition. The reason we do not have enough competition is due to the enormous amount of government interferences, rules, regulations, laws, restrictions, etc. that drive out small and new entrants into markets, or even prevent them from starting in the first place. As a result, it allows big companies to get richer simply because they can handle government regulations better due to their size.

I’ve said before that big government, by definition, means crony-capitalism. Big government tends to deal with big companies; thus, the more government intervention the more cronyism exists. The result is less competition and more profits to corporate America.

I believe that if you will eliminate the bottom 50% from cost–benefit point of view of government regulations, the growth in the economy will be huge, and competition will come back, meaning corporates will need to lower price and pay more for employees. Thus, the conditions for median class wages to grow robustly finally will exist.

I am very much against government intervention in the markets except at the very high level. It always works to make things better for the big companies and against competition. There is, however, one exception that I can think of where a government regulation—or, indeed, a law—can be just, efficient, AND favor the middle class.

It is estimated that about 400,000,000 days of earned vacation are not being used every year by working Americans. They are entitled to these days but they do not take them. They do not want to spend the money on vacation; they feel that it will be better for their career to stay in the office, etc. Most of these days are lost to the employees and are simply a gain to the employer. A law that makes it obligatory for employers to redeem for cash any unused vacation could transfer as much as $40 billion from the coffers of corporate America to the pockets of working America (and, by the way, of all classes, not just middle class). $40 Billion is less than 0.3 of 1% of GDP, but if corporate America profits’ share of GDP is about 2-3% above norm, that is a good way to start.

The rest is down to COMPETITION!!

Free the FREE market. It will take care of competition, income inequality, and more.