Why Should Wealth Inequality Be A Problem?

In a free, unhampered market economy, every market participant’s income and wealth will simply reflect the value consumers put on his or her services. Note here that it does not matter whether the services rendered are those of an entrepreneur risking his capital or those of a worker selling his labor on the labor market. The efforts of both will be appraised and remunerated accordingly by those who pay for the goods or services they offer. In a progressing free market economy, real incomes will tend to rise over time, as more and more capital is accumulated and investments in ever more productive production processes are undertaken.



Image credit: The Institute of Economic Affairs


Every human being likes to enjoy the fruits of the capitalistic market economy, which has eradicated many of the ills that plagued our distant ancestors and satisfied the needs and wants of the great mass of consumers. Many a person regarded as poor by modern day standards commands amenities that would not even have been at the disposal of a king few hundred years ago. In an unhampered market economy (which ours no longer is, more on this below), everybody is free to produce as much income or wealth for himself as his talents allow. Consumers judge what is offered to them every day anew, and no established businessman can rest on his laurels as an upstart offering a better mouse trap can best him at any time. The point we wish to make here is that in an unhampered market economy, everyone can become rich if he is talented and manages to produce something consumers want. Obviously, not everybody will succeed at this to the same extent.

The personal goals of human beings are not the same. Everybody enjoys material wealth, however, once one’s standard of living has reached a level at which one considers the most urgent wants and needs satisfied and one is no longer forced to live the life of the barest subsistence which has been the lot of the bulk of humanity for most of history, personal goals may differ vastly. Some people may want to become truly rich, others may prefer a more modest level of material wealth and in exchange have more leisure time at their disposal.

It is also worth noting in this context that in an unhampered market economy, there can be no institutional unemployment. As Rothbard points out in ‘Man, Economy and State’:


“Now what does economics conclude on the matter of unemployment or “full employment”? In the first place, there is no “problem” involved in the unemployment of either land or capital goods factors. (The latter condition is often known as “idle” or “unused capacity.”) We have seen above that a crucial distinction between land and labor is that labor is relatively scarce. As a result, there will always be land factors remaining unused, or “unemployed.” As a further result, labor factors will always be fully employed on the free market to the extent that laborers are so willing.”


(Rothbard’s emphasis)

Let us briefly consider a hypothetical example. Say Tom the soap factory owner has an income of $1 million per year, while Harry, who works for a computer company, earns $ 100,000 per year. Now let us say the economy is growing, and after two years, Tom earns $1,100,000 and Harry earns $120,000. In this hypothetical example, Tom’s income has increased by 10%, while Harry’s has increased by 20%. Nevertheless, Tom’s 10% represent, in absolute terms, a bigger slice of the total ‘pie’ if you will. And yet, why should that bother Harry? Aside from perhaps envy, he has no reason to begrudge Tom his higher income. What is important from Harry’s point of view is the increase in his own income.

Our current economic system is unfortunately very far from representing a truly free unhampered market economy. The current system is better described as ‘state capitalism’. However, it still offers enough freedom to enable enormous wealth creation, even though only an ever smaller percentage of the population as a whole is in fact engaged in this wealth creation process.

Alas, the inexorable expansion of the State and the four decades old experiment with a pure fiat money system directed by central economic planners whose wisdom is allegedly required to ‘smooth out’ the ‘failures of he market economy’ have brought us to a juncture where quite possibly more wealth is consumed than is produced.

What has motivated us to ruminate on the topic of wealth inequality is a recent speech by Sarah Bloom Raskin, who is a member of an organization that is deeply involved with this process – the Federal Reserve.


Joke of The Week – The Fed Worries About Income Inequality

According to a report by Reuters:


“Federal Reserve Governor Sarah Bloom Raskin said the financial inequality resulting from stagnating incomes for most Americans and rapid growth in wealth for the richest 1 percent is hindering the U.S. economic recovery.

“This inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently,” Raskin said today to a forum in Washington sponsored by the New America Foundation. The disparities help “drag down maximum economic growth and are anathema to the social progress that is part and parcel of such growth,” she said.”


It is certainly true that the disparity in wealth and income between the richest Americans and the rest of the population has grown enormously in recent decades. It is also true that the real incomes of the vast majority of Americans have stagnated for quite some time. How can that be? If we look at the time period that is relevant for this shift in income distribution, we find that it roughly coincides with the establishment of a completely unanchored fiat money system in the early 1970’s. Is this a coincidence? As the report – quite ironically – notes further:


Raskin backed the Fed’s unanimous decision last week to sustain record monetary stimulus with the aim of spurring the economic recovery and reducing unemployment, which rose last month to 9.1 percent. Policy makers boosted their forecasts for unemployment and cut their forecasts for growth this year and next while deciding to maintain the Fed’s System Open Market Account domestic securities holdings near $2.66 trillion and its main interest rate near zero.

“Finding ways to help more Americans safely grow their incomes and net worth in real terms arguably diminishes the destructive influence of income inequality by giving everyone a more secure footing in the economy and the same kind of flexibility and choice available to the more affluent,” Raskin said.”


(our emphasis)

We find this ironic because it is precisely the inflationary policy of the Federal Reserve that is the main reason for growing income inequality. In short, Mrs. Bloom Raskin has dutifully voted for the very policies that ensure the growing disparity she disingenuously complains about.

We are not quite sure what she means when she says: “Finding ways to help more Americans safely grow their incomes and net worth in real terms arguably diminishes the destructive influence of income inequality by giving everyone a more secure footing in the economy and the same kind of flexibility and choice available to the more affluent”.

Presumably the ‘ways’ she urges us to find refer to intervention by the government with the goal of redistributing wealth by means of coercion. Or perhaps she means that the Fed’s zero interest policy and monetary pumping should be seen as a “way of diminishing the destructive influence of income inequality” as she puts it. If so, then she couldn’t be more wrong. Let us explain.

The way the central bank goes about inflating the money supply is not ‘neutral’. Hypothetically, if it were done in such a way that everybody’s account would be credited overnight with the same percentage increase, then everybody would be ‘profiting’ equally by the inflation of the money supply. Of course, everybody would also immediately know it for the sham it is: it would be clear that in spite of the increase in cash balances, nobody did in fact get any richer. Prices would be adjusted overnight to such a widely known overnight increase in the supply of money. Nothing would in fact change. It would indeed be a ‘neutral’ event – and hence it would make no sense whatsoever to do it.

Alas, this is not how money supply inflation happens. In reality, new money enters the economy at specific points. There are thus ‘early receivers’ of the new money, which can spend it first on goods and service, well before the other actors in the economy realize that there is now more money in circulation than before. As this new money then percolates through the economy, the prices of various goods and services begin to rise to reflect the artificial demand that was not present before. Since money is created from ‘thin air’, there are no offsetting contributions to the pool of real funding by the earliest receivers of this new money. More money now in fact competes for the same pool of real resources that existed before. The fact that the money enters the economy at specific points ensures that first and foremost, the structure of relative prices is altered, an effect that furthers the malinvestment of capital. Obviously, those receiving the money last – as a rule, wage earners – will be at a grave disadvantage versus those that received the money first, as by the time wage earners get the money, many prices will have risen already – barring a timely increase in their wages, their real income will decline.

The creation of new money from thin air also hampers the creation of wealth more generally, as the exchanges of ‘nothing’ (money from thin air) for ‘something’ (the real resources this money buys) that it sets into motion diminishes the pool of real savings available to wealth generators (see also Frank Shostak’s remarks on this point).

It should be obvious why the policy of inflation increases wealth and income disparities. People who are already wealthy are as a rule in a much better position to protect themselves against the ravages of inflation. Most of their wealth will in fact be deployed in assets that see their prices rise as a result of the money supply inflation – often at a far greater pace than the increase in the prices of consumer goods and services. Rich people do not have the bulk of their wealth sitting in cash balances after all – much of it will be deployed in equities or other investments. Since titles to capital (i.e., stocks) tend to rise in price faster than consumer goods when the money supply is inflated, wealthy people often end up profiting from the inflationary policy. Relatively less wealthy wage earners are in a far worse position. Wages are as a rule one of the last things to increase in reaction to money supply inflation. They barely keep pace with the increase in the prices of consumer goods. As a result, the increase in real wages brought about by capital accumulation is much diminished by inflationary policy – hence the stagnation of real wages that has begun with the era of unfettered fiat money.

As Reuters reports further on Mrs. Raskin’s remarks:


“Raskin didn’t speak about the immediate economic outlook or the Fed’s plans to end its $600 billion bond-buying program on June 30 as scheduled. She supported the plan, begun in early November, just a month after she took her post at the central bank.

Fed Chairman Ben S. Bernanke has said the bond purchases are intended to encourage consumer spending and fuel growth. Still, the stimulus plan isn’t a panacea for the economy’s problems, and unemployment probably won’t return to a more normal level of 5.5 percent until the middle of this decade, he has said in speeches and congressional testimony.”


‘Growth’ is not ‘fueled’ by an increase in consumption. Higher consumer spending is an effect of economic growth, not a cause of it. Ben Bernanke is putting the cart before the horse. If the indeed the intended effect of the Fed’s bond purchases is to ‘fuel growth by increasing consumer spending’ then no-one should be surprised at its failure, which is preordained.

The article continues:


“Raskin cited the Fed’s Survey of Consumer Finances, released in March, which showed the poorest 20 percent of families saw their net worth fall by 18 percent from 2007 to 2009 and households in the middle of the income distribution saw their wealth decline by 21 percent. Raskin also cited statistics on these families’ access to financial services, saying one in four households earning $15,000 a year or less don’t hold a bank savings or checking account.”


The boom-bust cycle created by the Fed’s policies is the major reason for these deplorable developments. If Mrs. Raskin wants to alter the situation for the better, she should campaign for the abolition of the Fed and a return to honest money and a free market.

The article continues:


Raskin said the financial crisis “has left many lower- and moderate-income Americans in danger” and that regulators must work to help these consumers gain access to financial services.

“It is incumbent upon regulators to ensure that these products and services are safe, affordable, transparent and easy to understand, regardless of the provider,” said Raskin, who was appointed to the Fed’s board by President Barack Obama, after serving as Maryland’s commissioner of financial regulation.

“In some cases, regulators may need to ban products that are inherently unfair or deceptive,” she said. “Regulators must also actively monitor the consumer financial market to guard against developments that might threaten the stability of the overall economy.”

Regulation and innovation by financial firms aren’t “inherently contradictory,” Raskin said in response to an audience question. Financial institutions should help to reduce inequalities in income and in access to financial services, she said.

In previous speeches as a Fed governor, she has called for the swift implementation of the Dodd Frank Act. The law, enacted last year, overhauls the nation’s financial rulebook with the goal of preventing another financial crisis.

Raskin, in remarks in April, said regulators will “certainly be dealing with the long-term consequences of the crisis for years to come.” That fallout, she has said, included “dislocation, joblessness and loss of confidence.”


(our emphasis)

According to Mrs. Raskin then, the creation of wealth for the poorest members of society depends on the activities of ‘regulators’ and their interventions in the market for financial services. This, not to put too fine a point on it, is unadulterated nonsense. Obviously Mrs. Raskin is a firm believer in the nanny state, as her remarks about ‘banning certain financial products’ indicate. She seems to think that poor people are simply to stupid to decide such things for themselves. Perhaps someone should remind her that a previous bout of government intervention that aimed at getting all those poor people their own homes was – along with the Fed’s low interest rate policy – instrumental in fostering the bubble that has created the current sad state of affairs.

As to the telephone-book sized Dodd-Frank monstrosity, it represents a failed attempt to close the barn door long after the horse has escaped. Obviously it will do absolutely nothing to ‘prevent the next financial crisis’ as long as a central bank-led fractionally reserved banking system based on fiat money is in place. What we can be sure of is that it will diminish freedom and that it will have unintended consequences galore – very likely it will hamper recovery in numerous ways. We agree with Mrs. Raskin that we “will certainly be dealing with the long-term consequences of the crisis for years to come”. This is because contrary to J.M. Keynes’ famous bon-mot that ‘in the long run, we’re all dead’, the long run has now finally arrived right at our doorstep.

The crisis however was not the result of there not being a big enough nanny state or not enough regulation of the financial sphere prior to its outbreak. As we have pointed out many times before, the crisis was centered on the one market sector that was clearly the most heavily regulated and subsidized sector of all, the one sector in which statist intervention was and remains greater than in any other, namely mortgage finance. The crisis was not due to a ‘lack of regulation’ as the current Helicopter pilot argued in his disingenuous apologia attempting to exonerate the Fed. It was on the contrary the inevitable result of the capital-consuming boom that preceded it, a boom the Fed was directly responsible for.

As regards the growing disparity of wealth and incomes, it is likewise a direct result of the Fed’s inflationary policies. It is not a problem that requires even more intervention and regulation to be cured. All that is required is a return to sound money and free market principles. That would of course mean that there would no longer be any speeches by Fed officials we could criticize, but that would be a very small price to pay indeed – and we’re quite willing to pay it.


Fed governor Sarah Bloom Raskin – worries about growing income inequality wothout acknowledging the fact that the Fed’s policies are the main factor in creating it.

Photo credit: Ros Krasny, Reuters




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2 Responses to “Wealth and Income Inequality in the US”

  • Floyd:

    I do not understand the rationale backing Rothbard’s statement that labor is more scarce than land. Could you please explanation?

    At least at the upper bound, isn’t land a limiting factor to the growth of a planet’s population?

    A side note, any activity has overheads.
    A low-end laborer may produce such little value, that his pay won’t even cover for the cost of public transportation to the working site. (Obviously, such pay must be smaller than the value produce-able by the laborer).
    Won’t this result in unemployment?

    • Rothbard’s point is that at PRESENT, the original factor of labor is clearly more scarce than the factor of land – we can see this by the fact that a great deal of land lies fallow. If population should ever increase to the point where land (in the widest possible sense of the term) were more scarce than labor, then we would have a real problem.
      So in principle you are correct, land is to some extent a limiting factor, but this is not yet relevant. Also, as humanity has grown in numbers, so has the productivity of land. This is why the Malthusian catastrophe never happened. Today we can grow crops with yields that are ten imes of what was possible a century ago. We can mine for minerals in an economically viable manner even if those minerals are only present in tiny concentrations in the ore mined. We constantly find new ways to exploit natural resources that were previously impossible to exploit. So it will be a long time indeed before land becomes a limiting factor and becomes more scarce than labor.
      It is true that the most unskilled laborers would not be able to command a high wage, but if we assume a true free market economy without any institutional barriers, then it seems not possible for the fare to drive to the work place to be higher for an unskilled worker than his wage. Labor is in fact a scarce resource, and as such, wages are subject to competitive bidding as are all other inputs. Today, there are many people who are out of work entirely, because the market price of the labor they can offer is lower than the mandated minimum wage. However, in what way does the minimum wage help such people? The result is that they can not even work for a lower wage if they WANT TO. Surely many unemployed people would prefer accepting a lower than minimum wage to being unemployed. Note that the question of whether such a low wage suffices to sustain them also hinges partly on the degree to which a free market is allowed to flourish. Most prices we pay for goods and services today are after all vastly inflated by regulatory compliance costs and taxation.

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