Inflationomics

Income Inequality, Part 2

Income inequality in the United States is still in the news, and probably will be for some time.  And it’s no wonder, with all the specious notions about why the inequality is growing.  Some people blame globalization, others blame broken homes, crime-filled communities, dysfunctional schools, and personal chaos.  Still others blame the rich for having as their one overriding goal “to protect what they have and get even more,” with the result that the rich bribe politicians into giving the rich ever more tax breaks while the poor struggle to make ends meet.

And their “solutions” to the problem are even more laughable…raise the minimum wage, hike top tax rates, or succumb to the notion that this phenomenon is inevitable and there is no solution.  Of course, if no one knows the true cause of the problem, no one will be able to figure out the answer…

So let’s start with the basic question of how an individual can increase one’s income…it’s called increased productivity.  From a personal perspective, one must learn how to manage more capital, for it is capital that makes people more productive.  A back hoe operator is more productive than a shovel wielder.  A computer expert connected to an internet can produce and market more than someone with a typewriter.

The next obvious step to increased income is saving and investing in one’s future, through better education and more capital…generally, the tools of one’s trade.  From a business perspective, businesses must save and plow back profits into more capital to make its workers more productive, and thus increase profitability.  From a government’s perspective, a government must make it possible, nay, easy, for businesses and individuals to save and invest in more capital, thus making its citizens more productive and prosperous.

Unfortunately, most politicians are more concerned about getting re-elected and extending their power through hiring more unproductive, nay, consumptive, bureaucratic employees and expanding the government’s sphere of influence than they are about their citizen’s well-being.  The bottom line is that all governments consume wealth, either by taxing the wealth from its citizens and giving the money to unproductive government employees, welfare recipients, military forces that destroy other countries’ capital, or through a bureaucracy that makes life more difficult for the people who are trying to get ahead.

Consider how many trillions of dollars the U.S. government has spent (consumed) on welfare, corporate and farm subsidies, military adventures, “government security,” and pork barrel spending in the last one hundred years (and unemployment continues to rise).  Just imagine how much more productive/richer Americans could have been if that money had been put to some productive use.

But that’s only part of the picture…there’s also the Federal Reserve System that was established as the United States’ central bank.  Its mission has evolved over the years to manipulate the economy and make it appear to be prosperous.  It does this primarily by manipulating the currency and interest rates.  By keeping interest rates below market rates, it discourages the saving needed to accumulate more capital, thus making Americans poorer in the long run, encouraging borrowing, and mergers and acquisitions instead, and sending capital fleeing to other parts of the world where it can earn a market rate.

By printing more paper dollars and expanding credit, the Fed eventually produces price inflation and because the world is on a U.S. dollar reserve currency standard, exports the inflation to the rest of the world, temporarily making the world appear to be more productive with rising prices.  When the poorest parts of the world, with people living on $2.00 per day, experience price inflation, people starve and riot.  When the Fed cuts back on its money printing, after the world has grown accustomed to the Fed’s profligacy, it strengthens the U.S. dollar and slows spending, thus wreaking havoc on other currencies and fragile economies around the world.  In short, the Fed is manipulating economies around the world, first with inflation, then with deflation.  First consuming/transferring wealth, then driving businesses out of business.  Only the rich stand a chance of defending themselves against this pincer attack from wealth-consuming governments.

While it’s not just the rich who will try to preserve their wealth (who wants to be poor?) from ever more profligate governments, it’s easier for the rich to move themselves and their capital to a more capital-friendly environment.  So while politicians (and their ever poorer voters) consume more wealth, the rich are gradually moving their wealth away from the less capital-friendly environments.  Unfortunately, it’s the poorer people  (which now includes the middle class) who feel the loss of capital first, and as the capital consumption increases we hear more and more complaints…until all the capital is gone, or until we get rid of capital-consuming governments.

The bottom line: as long as the world’s politicians/bureaucrats continue to consume wealth with inflation, taxes, business-stifling regulations, wealth confiscation/transfers, the inequality of wealth will continue to grow.

Robert Jackson Smith

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