The Case For — and Against — Income Inequality

Economy Nov 13, 2019

Current Free-market capitalism —

Capitalism is not the perfect system. Instead, it designed and developed in a way that offers an illusion of self-control for a population governed by that very system.

Free-market, market-driven economy and limited government are the cornerstones of capitalism. And, to work and function effectively, such a system has to maintain the ability to guarantee these two main contributing factors.

  1. Rely upon market forces to manage its economy.
  2. Free from any intervention, from any political system or unelected bureaucrats.

Yet, throughout the history of capitalism, we have witnessed a multitude of failed economic cycles that directly contributed to generations of inequality.

And in the aftermath, studies conducted to understand the root causes and impact showed us enough evidence of mismanaged policy implementations and the roles played by people in charge of governing the system. It also confirmed that during and after an economic crisis, wealth disproportionately accumulated at the top and leaving the rest to wither.

Whether one likes it or not, that's the current state of capitalism.

Why Inequality is Inevitable

Most of the supporters of capitalism come down on this side of the economist camp, which is supporting what called Supply-Side Economy, a.k.a Trickle-Down Economy.

They believe that the best way to grow the economy is by increasing income for both individuals and corporations through tax cuts and fewer regulations, and among other business-friendly measures.

The only problem with that approach is that it's placing the biggest bet on the market participant's anticipated behavior in response to their policy offerings. And they are pinning their hope on these predictions to have successful policy implementations, and that ultimately meets the expectations of the stated goal. When all is well, after this kind of policy implementations, the ensuing virtuous cycle must match this predictable pattern of economic activities in the market.

Five-step feedback loop —

  1. Starting with a reduction in rate and regulations. That means, initially, more savings for people and less revenue for the government.
  2. With additional funds, increase business spending and create more jobs.
  3. Due to an increase in labor demand, consequently, the market push wages higher.
  4. More money and more spending by people. And, this leads to more economic activity.
  5. And all of that would translate; Increased tax revenue and less deficit.

However, in reality, this may not happen exactly all the time and, most importantly, at the expected level. Accumulation of historical evidence suggests that realizing co-ordinated activities of all participants in the market near impossible, and even a slight deviation from one or more participants enough to throw the policy outcomes off-balance.

In the end, this means that uneven distribution of economic benefits along the value-chain —  consequently leads to inequality in the system.

Others adopt the hands-off approach —

You may hear this argument before frequently; some of the proponents of capitalism say that by design, inherently, inequality is built-in; hence, it's not worth complaining about it.

So, Get over it. And wait for free-market to work its magic.

Some look in a different direction —

The irony is that this argument is coming from those who have already in an affluent economic class. And this group members individually have millions or billions as net worth against their names.

They want us to look at a different direction, and insist that income equality exists not just because of any unfavorable economic policies. Rather readiness of people in the economy itself to blame and effectively contribute to keeping them from upward mobility.

While seeing this problem differently and directing the conversation in another direction, they are pinning the problem with Insufficient Income Earning Potential.

And their diagnosis is that the current education system is not good enough, and not educating them well enough to meet the changes in the economy. Which may be true, in part, but not the only problem as alleged.

In the current setup, systematic issues exist in the educational system in the U.S., which needs immediate cleanup, and enough urgency in stopping them from further contribute to inequality. And such measures should commit to revisiting critical aspects of education starting from the way education financed, the quality of curriculum to graduates transition into the workforce, and beyond.

Some are Indifferent —

When it comes to inequality, surprisingly, even some liberal politicians are averse to taking radical initiatives and not eager to address this injustice wealth gap.

For them, an alternative that stands counter to the current system and clamoring for structural changes, squarely denounced as not workable and impractical. And their justifications ranging from citing country readiness for such changes, and the consequent disruption in the way of life.

And Liberals are not alone, other ends of the political class are no different towards the plight of the general population either. They don't want any part of that problem and placing the onus at the individual's doorstep. With the argument that inequality is the "Byproduct of Choice."

What they mean is that individual did ultimately end up in poverty through their self-destructive behavior. Yet, these politicians with responsibility and power to make the difference through their choice of addressing this problem, conveniently choose to ignore it.

What are the alternatives —

It's inevitable sooner than later that this disenfranchised society will start demanding their ration of prosperity — either through the obedient political process or through protest.

Let's face it, in that case; it's not if, but when. And only a matter of time before we all start seeing the socialist economic policy rolling down from the echelon of power.

Such socialist policies proposed are endless, starting from single-payer health care, tuition-free colleges to earth-friendly environment regulations, and universal basic income, etc.

And, inevitably, questions that follow is how do we fund all of these?

Modern theory to rescue —

To fund these massive spending's, some liberal economists proposing a monetary policy that may only works for the United States — They call it MMT as an abbreviation for Modern Monetary Theory.

MMT — advocates for debt and deficit spending as long as the country's governing system does manage to have an increase in income and less inflation in the economy.

In theory, debt is not an issue because the government is borrowing on its currency and merely represents a promise. And enthusiastically pointing out that what is debt for the government will reflect as an asset in the private market.

Oppositions to such monetary policy were swift from the other side, highlighting that other countries failed such experiments elsewhere in the world economy, and warning that the U.S. will meet a similar fate.

Even though I have to pick and choose the specific ones to highlight here as significant contributing factors of inequality, there are other granular level issues out there that equally causing an imbalance in the community.

Things like these

  • Minimum wages not indexed to inflation
  • Much of the tax number concerted to lump sum, and not indexed
  • And similarly, social safety net programs benefits are fixed rather than indexed to inflation.
  • These and many others were contributing to inequality over time.

Note:

I will update this column if I come across any new story or spin supporting either case.

Inner Voice — @renttheant Staff Writer

Inner Voice

I am "Rent The Ant" Inner Voice. The collective voice of our team both in-house and partners.