Krugman and many leading left wing economists are decrying the great income disparity over the last few decades. Brad DeLong reviewed NYU professor Edward N. Wolff’s Top Heavy. Professor Wolff described a trend that was already well underway over a decade ago, and has perhaps become even more acute.
Now, is there some concern about this? Perhaps. The problem lays in how we examine it.
Wealth and income inequality are not causes of, but are actually results of, policy. Those on the left will of course argue that lower and less progressive taxes, less redistributive programs, and other socialistic and Keynesian rubbish caused this. Thus, higher taxes, more spending, etc., is the cure.
Wrong on both counts. The truth is actually rather simple, and it is a double edged sword. Austrians are well armed when it comes to this debate.
What is the cause:
Notice how perfectly monetary expansion and general inflation go hand in hand.
(Austrian theory is clear: true inflation is expansion of the money supply. So, this graph is maybe redundant. Except, it is the inflation of the money supply that debases the currency, which results in higher prices. So, higher prices are the effect of inflation. Although you can’t measure true inflation through prices. However, suffice to say, higher prices are certainly a result of printing money. That much is proven historically.)
So, what does this have to do with income inequality? In a word: debt.
Like prices and monetary expansion, debt and monetary expansion go hand in hand. Inflation reduces the value of money over time, reducing real payments over time. This “rewards” borrowing and debt, punishes savings and lending.
Printing money (inflation) causes prices to rise. This eats into incomes and purchasing power. It punishes saving. Over time, it impoverishes society. Thus, if nothing else, the income inequality is due in large part to the federal reserve printing money since 1971 (a most fateful year in US economic history) and eroding real incomes and real living standards.
General price inflation (what is at least commonly called such) should hurt all, but in truth it doesn’t. Prices do not rises universally and uniformly. New monetary injections benefit those who receive it first, and end up hurting those who receive it later. Guess who gets first dibs on new money? Well, it isn’t the working man.
To the Keynesian, inflation is not a problem. Sadly, it is even being encouraged by many, even some Nobel prize laureates.
The second part of the problem is debt. Debt requires the government to borrow. To the Keynesian, this is not a problem either as government borrowing doesn’t crowd out private borrowing. Even if it did, print more money until it doesn’t.
What does debt do? Debt is purchased by the public, which displaces private, productive investment. This debt needs to be serviced, at least with interest payments. Taxes must be collected from the income earners (lower incomes) and transferred to the bond holders (higher incomes).
And here is where the disparity is exacerbated. Bondholders typically are wealthier, as they have the funds available to lend. These funds should have been invested into wealth generating ventures, but instead they are diverted into government consumption/wealth destruction activities.
Debt and inflation, the Keynesian cake and ice cream, create income inequality, destroy wealth, and impoverish society. These are the awful truths that the leading Keynesians don’t want you to know. Their beloved monetary printing, debt driven, inflation creating fairy tale has created the exact situation they so condemn.
But, according to the same Keynesians, if we’d only do more of it…