Typically, when I hear President Obama use loaded terms like ‘income inequality’ and ‘social justice’, I get nauseous and immediately tune out. Income inequality is just political speak because it presumes some desirable level of fairness that should drive public policy. Of course, that is a ridiculous notion. The imposition of someone’s idea of ‘income equality’ would be socialistic at best and tyrannical at worst.
Income disparity on the other hand, has a more concrete meaning because it refers to income differences that are measurable in real terms. Whether or not it is important is another matter. I would argue that traditionally, income disparity in the United States has not mattered. Income mobility, which refers to the speed, ease and frequency with which individuals can move up the income ladder has been, and should be considered far more important. It is the hallmark of a robust free market economy.
How income disparity is measured and analyzed can be problematic. The left will often report such disparities in dollar terms rather than in terms of their proportionality and they usually do not include factors affecting net outcomes such as welfare and taxation. Nevertheless, such disparity should not matter so long as income mobility remains high.
Prior to the end of the Bush era and the beginning of Obama’s Presidency, I would have said that income disparity was a non-issue. However, that disparity has widened despite the imposition of big government policies aimed at among other things, wealth redistribution. This suggests that such policies are not leveling the paying field, but are instead enriching insiders and curbing opportunities for upward mobility.
A healthy growing economy will naturally have income disparity, but it should also exhibit rising wages at all income levels. That is not happening for a number of reasons. First, the real unemployment rate remains very high. It is important to remember that the official rate only measures the percentage of active job seekers who are without a job. This is what is referred to as the ‘labor participation rate’. Thus, the official number does not capture those who have given up on finding employment or those who are working part-time, but would prefer full-time employment. The labor participation rate is at a historic low. Chronic long-term unemployment will only serve to widen income disparity in the future because the income potential of these individuals is being eroded every day that they are on the sidelines not gaining necessary skills and experience.
So, what the big impediment to hiring? To put it succinctly, the government has not allowed wages to bottom out. This requires some explanation. Access to cheaper labor is needed in the short-term during a recession or slowdown in order to return to full employment. This is because when excess labor exists, the laws of supply and demand reduce market wages, which in turn reduces the cost of new investment and helps kickstart recovery. Wages begin to climb again when hiring expands and there is more competition for available labor. The government has prevented wages from bottoming out by increasing the net cost of hiring with onerous taxes and regulations like Obamacare, which function as a de facto minimum wage hike. The administration has also enabled the unemployed to opt out of taking lower paying jobs by repeatedly extending unemployment benefits.
The unemployment rate does not explain income growth at the top of the economic scale. That has to do primarily with the Federal Reserve’s monetary policy. Despite the lack of economic growth, the equity markets are at record highs. This is primarily due to the devaluation of our currency through quantitative easing, which is essentially digital money printing that inflates the price of assets. It will eventually lead to price inflation elsewhere if it hasn’t already. Inflation is basically a hidden tax on the poor and middle classes because their wages rarely keep pace and that makes it difficult for them to build wealth through savings and investment. Contrast that to those whose wealth is already established. They are less affected since the value of their existing assets will usually keep pace with inflation. The other reason that inflation should be understood as a tax is that it is always the result of governments spending more money than they actually have.
The United States has also been in dire need of comprehensive tax reform for some time. The tax code is far too complex, which has all sorts of unintended consequences. Corporate taxes are basically middle and lower class taxes because they suppress wages and limit hiring. They also discourage the repatriation of profits earned overseas, which limits the amount of capital that is available domestically. Rather than embrace reform that is focused on growth, this administration has maintained ideological rigidity by pushing for higher taxes on businesses, individuals and investment. They have also made the tax code more convoluted by utilizing it as a social engineering tool. The IRS is now charged with doling out Obamacare subsidies based on income. This has the potential to create perverse incentives such as voluntarily capping one’s own income or avoiding marriage in order to qualify. The administration has also sought special tax breaks for pet industries such as solar power and electric vehicles, which rewards insiders at the expense of others. All of this puts downward pressure on opportunity and income mobility.
It is also worth mentioning that a complex tax code advantages those with the knowledge, resources and connections to take full advantage of it. The same thing happens with regulation that is supposed to protect the individual. The largest companies use their influence to ensure that the rules enshrine their business models, which limits competition. This is all at the expense of the individual tax payer and consumer.
Finally, expanding access to means-tested entitlement programs like welfare and food stamps exacerbates social problems such as long-term unemployment, government dependency and single parenthood. All of these problems impede upward income mobility. Few people realize that the stimulus bill significantly reduced the eligibility requirements for food stamps. President Obama also used executive authority to eliminate most of the welfare work requirements.
The cumulative affect of this shift toward larger and more intrusive government is the start of a very dangerous long-term trend whereby individual initiative is constantly curtailed and whereby wealth is increasingly created and protected not through free market competition, but rather through cronyism. This will result in a lower standard of living as well as the decline of income mobility. Under that sort of system, income disparity can become dangerous by leading to either instability or authoritarianism.
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