Friday, June 21, 2013

Why Inequality?

Along with the premier of the latest cinematic iteration of The Great Gatsby, come a disturbing trend--superficial analysis of economic inequality. A good recent example is "Great Gatsby Economics" by E. J. Dionne. The author draws on the work of economist Alan Krueger who developed the "Great Gatsby Curve" to measure income mobility across generations. At once Dionne argues against the economic status quo as producing more economic inequality than in the three decades following World War II and calls for more egalitarian public policy. He means of course that we need more income redistribution and cites Krueger's claim that luck has a lot to do with who is profitable as a moral argument in favor of state redistribution of wealth.

Before suggestion solutions, however, perhaps we should establish causal relationships. Why is it that economic inequality has seemed to increase over the past ten years? What is it about the status quo that promotes inequality and a reduction in income mobility?

As I have written before, one of the primary reasons income inequality has expanded over the past decade is do to monetary inflation. Economists have known for decades that when the stock of money increases, spending will increase, driving up the overall prices of goods. The prices of goods, howver, do not go up proportionally for everyone all at once. When the banking system, prodded by the Federal Reserve, increases the money supply, it does so by expanding credit. Those who receive the new money first are able to buy durable consumer goods, capital goods, and financial assets before prices in general increase. These people who receive the money first benefit from wealth redistribution in their favor. They are able to accumulate more capital and financial assets. To add economic insult to malnivestment injury, after the financial meldtown of 2008, many of the principle beneficiaries of inflation who subsequently made bad investments were bailed out by taxpayers or the Federal Reserve, perpetuating the redistributution of wealth.

Any claims that we must reign in the free market because it breeds ever-widening income inequality utterly fails to recognize the myriad forms of government intervention into our economy and especially government manipulation of our monetary system. Such rhetoric attackes a straw man and, hence, leads us all astray. What we need to reign in is crony capitalism and the ideologies that support it.

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