Public policy shouldn’t worry about ‘solving’ inequality

Guest Column: Mike Stenhouse
As we observe the “Occupy” phenomenon, the issue of income inequality has become a national debate. More

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Public policy shouldn’t worry about ‘solving’ inequality

Guest Column: Mike Stenhouse
Posted 1/2/12

As we observe the “Occupy” phenomenon, the issue of income inequality has become a national debate.

Other than alienating some progressive notion of fairness, I have not heard a cogent argument as to how the condition of income inequality negatively affects our economy. Yet many believe that, by addressing the symptom, we will solve the underlying economic malady. Free-market theory would instead suggest that income inequality is the result of economic bust periods and an expected part of the normal boom-bust cycle.

During difficult economic times the rich will disproportionately be able to protect their wealth because they have the means and because they steer the wheels of industry. To keep profits high they can downsize, reduce wages, and eliminate capital purchases or investments in new technologies. As uncomfortable as this might be to some, this is just “business,” not evil. Profits are why they risked their wealth in the first place.

Conversely, during boom times, as competition for labor intensifies, the wealthy, via their companies, will offer higher wages and equity positions to more people and will also invest in growth via myriad other purchases. During these periods the lower and middle classes will gain more proportionately from the fruits of industry.

If not income inequality, what then was the cause of the recent recession? While the occupiers claim that it was the failure of capitalism, I would contend that the real problem was the monkey wrench of big government within the gears of capitalism, motivated by the false notion that the government should legislate fair outcomes.

Think about it. What were the three major industries that failed? Housing, banking/ finance and auto: three of the most heavily regulated industries in America.

As for the “1 percent,” or millionaires, a recent Cato Institute survey found that 80 percent of them are first-generation rich, meaning they didn’t have it handed down from their families. Today, that same 1 percent pays about 37 percent of all federal income taxes, while earning just 16 percent of all income. Isn’t this inequality?

Interestingly, the nonpartisan Tax Foundation found that since 2007, there has been a 39 percent decline in the number of millionaires, and that the top 1 percent earned 20 percent of all income just a few years ago.

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