Fed, Not Capitalism, Responsible for Income Inequality

Fed, Not Capitalism, Responsible for Income Inequality

“Income inequality in the United States has been growing for decades, but the trend appears to have accelerated during the Obama administration.”                                                                                                 The New York Times

Today, America has the widest gap in income equality in history.

If capitalism is to blame, as French economist Thomas Piketty claimed in his bestseller, Capital in the Twenty First Century, how can that be?

During the past eight years, the federal government has virtually taken control of healthcare, the Internet (regs to come) and, to a great degree, the financial sector. The minimum wage has doubled in many markets and spending on entitlement programs such as the supplemental nutritional assistance program (SNAP) has skyrocketed.Gini Coefficient

In other words, America has moved much closer to socialism, with greater government control over our lives. Capitalism has ebbed, as fewer businesses are being formed and fewer still are going public.

President Obama made income inequality the main theme of his 2015 Economic Report of the President and his last two State of the Union speeches.  As Occupy Wall Street, MoveOn.org and other left-wing and left-leaning organizations have made income equality their rallying cry, the gap between rich and poor has widened.

How come?

Blame the Fed

One party to blame is our favorite whipping boy, the Federal Reserve Board.

As ZeroHedge points out, self-incriminating research titled, “Are Rising Stock Prices Related to Income Inequality?” implicates the Fed in “an accidental admission that the Fed itself has been instrumental in creating the widest wealth and income gap ever seen in US history (now even greater than the Great Depression).”

We’ve frequently chronicled the Federal Reserve Board’s manipulation of the stock market. And, of course, that ongoing manipulation has consequences–the main one being that the rich get richer.

As the chart above shows, the Gini coefficient, which measures income inequality, moves roughly in concert with the stock market. A Gini coefficient of 0 means incomes are perfectly equal, and a coefficient of 1 means they are “perfectly unequal,” whatever that means.

The Fed authors write, “Comovement between stock prices and income inequality results from the fact that gains in the stock market tend to benefit those in the wealthiest portion of the income distribution, who have better access to and higher participation in these asset markets.”

A 2015 study by Emmanuel Saez, a professor at the University of California, Berkeley, found that the average income of the top 1 percent had grown by 11.2 percent in real terms since 2009, while the bottom 99 percent saw their incomes decrease by 0.4 percent.

We wouldn’t conclude that the Obama Administration and the Fed are solely responsible for income inequality, but there seems to be a measure of hypocrisy to allowing the Fed to manage the economy while railing against income inequality.

Nor are we concerned about income inequality.

While many CEOs, like many athletes, are overpaid, shouldn’t a company’s CEO be compensated for creating jobs, paying taxes, developing new products that improve our quality of life and strengthening America’s economy? Should the person who stocks shelves at your grocery store be compensated the same as the scientist who is toiling night and day to find a cure for Alzheimer’s disease or cancer?

The 1% may make much, much more than anyone reading this blog (we’re guessing), but they don’t really affect us. We’re frankly more concerned about the half of the country that doesn’t pay taxes. We don’t have to support the 1%. We don’t pay for their healthcare or their kids’ college education.

Socialism and over-regulation decrease everyone’s income and eliminate jobs.  Capitalism and free markets increase everyone’s income and create jobs.  Which would you prefer?

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