Growth Best Cure for Income Inequality

Income inequality is a popular discussion topic these days. President Obama made it a central talking point in his recent State of the Union address and policy initiatives – most notably minimum wage hikes – have been proposed as means of reducing such inequality. Unfortunately, while inequality has unquestionably grown in recent years, there are few proven solutions and a lot of heated rhetoric.

It is worth noting that growing inequality is not unique to the United States. According to The Economist, inequality around the world has been growing since the mid-1980s in all areas except impoverished sub-Saharan Africa and the former Soviet Union. In other words, to an extent, inequality is a sign of economic development and strength. There is truth to Franklin Roosevelt’s observation that “Capitalism is unequally divided riches while socialism is equally divided poverty.”

In other words, people are not equal. Their skills and work ethics differ greatly. In a free society, we will all be more prosperous overall, but some will be much more prosperous than others.

There are a number of reasons why inequality has grown in recent years. Highly skilled people are in great demand, can command higher pay, and due to improved technology, global economic development, and freer trade, can sell their work on a global basis. Think of the ways in which globalization has multiplied the earning ability of athletes like Lebron James and actors such as Tom Cruise who are international superstars. In decades past, the limited size of the markets available to them limited their exposure and earning power.

While the high-skilled and unique have done very well, low-skilled laborers, especially in manufacturing, are increasingly competing against workers around the world, immigrants, and machines. There is no way around this reality. The solution is to spur educational innovation, preferably in the form of school choice, to move more workers into the high-skilled, in demand group.

Another cause of increasing inequality is money printing on the part of the Federal Reserve. A former top official at the Federal Reserve, Andrew Huszar called the Fed’s recent money printing “the greatest backdoor Wall Street bailout of all time.” Printing money helps big businesses, banks, and investors at the expense of savers, workers, and everyone else. It is time to reign in our nation’s monetary policy.

Speaking of bailouts and subsidies, it is worth considering the myriad ways in which government policies transfer wealth from the poor and middle classes to the very wealthy. New Mexico’s spaceport is one such example as are subsidies that were given to HP, Eclipse, and Schott Solar over the years.

In Washington, farm and housing subsidies skew to the rich as does flood insurance. And, of course, entitlements like Social Security and Medicare hit all workers with regressive taxes for the benefit of Warren Buffett and other wealthy seniors. Both systems are in dire need of reform that will both spur economic growth and allow poor and middle income workers to build their nest eggs and sock away money for future health expenses.

Unfortunately, the left’s solutions for inequality generally involve massively expanding the size of government. Raising the minimum wage is the most notable solution that has been proposed at both the state and federal levels. Unfortunately, there is no evidence that raising the minimum wage positively impacts inequality. In fact, with the unemployment rate for black teenagers at 35.5 percent and the rate for all teenagers at 20.2 percent, raising the minimum wage will have the long-term effect of pushing more working class youth out of the work force in favor of higher-skilled workers or machines.

Undoubtedly, inequality is a challenging problem. The good news is that improving the economy for all Americans doesn’t require us to loot people like Bill Gates, Lebron James, and other wealthy people who have made the world a better place through their skills and products.

Rather, policymakers both in Santa Fe and in Washington need to focus on growing the overall size of the economic pie, not finding better ways to redistribute wealth in an economy that is no longer growing.

Paul Gessing is the President of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.