Is Neo-Liberalism to Blame for Wealth Inequality?

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Wealth inequality

Is neo-liberalism to blame for wealth inequality?

Much of the rhetoric surrounding the far left and Green Party, regarding economics, are about the horrible condition of income inequality, and the inability of the middle and lower classes to experience financial growth.

Like many things, they’ve predominately blamed neo-liberalism, globalization, corporatism and capitalism for disparity in financial improvement.

Capitalists have largely ignored the issue, but I’ll break the silence and make a few vital points. Then I will judge the list of factors that Elizabeth Warren and her group have blamed, in their witch hunt, and explain if they really played a role.

First, income inequality in and of itself should be deemed irrelevant if the working class is improving. If the lowest quintile of citizens has a real income growth of 1% during the same time the top quintile grows by 4%, the fact that one group is doing better shouldn’t really matter. Seeing socialism’s record with redistributing wealth, I wouldn’t want them to touch anything.

Further, the left also needs to define their goals; even (the few) left-wing economists admit that tax cuts can often raise revenue. Thus, if their goal is to create a massive bureaucracy, then they wouldn’t want top tax rates to go too high.

In instances such as the post Second World War era, when the top tax rate was 91%, cutting taxes both helped the rich prosper and brought in more revenue. I hope their end game is larger government rather than taking away wealth.

Finally, it’s also vital to point out that income inequality shouldn’t matter if our country is wealthier from the top to the bottom. Sure, Switzerland does have more wealth inequality that the Bernie Sanders socialist model of Sweden, but this shouldn’t matter. If you multiplied the GDP of Switzerland by the percentage of wealth the bottom 10% has and divided it by one tenth the population, a poor Swiss person still brings home $25,900 a year. The average Swede in the bottom 10%, meanwhile, made $16,350. Keep in mind this doesn’t include taxes, which would surely widen the gap further considering that the poor Swede will carry a much larger tax burden since their tax brackets are much higher and flatter, while the top tax rate in Switzerland is 11.5 percent. It follows that it would be illogical for Sweden to worry about income inequality beyond the fact that the lower class is struggling immensely.

Alterations to the income tax code

A common notion among leftists and Democrats is that the Reagan tax cuts and neo-liberalism lead to rising income inequality in the United States. Here’s the inconvenient truth about taxes since the 1970s: for many of us, they’ve gone up.

Even when you include the Bush tax cuts that helped everyone, the middle and lower class of today is paying more.

In 1977, the US tax code had over two dozen tax brackets ranging from 0 to 70%.

A single person in 1977 making $60,000 (when the brackets and income are adjusted for modern inflation and prices) would pay 19.6% and the highest income bracket they would hit would be the 29% bracket (For reference, a $60k salary 40 years ago was $14.8k). Meanwhile, someone today with the same income would pay 18.4%. Of course, this isn’t the full story as we must also factor in payroll taxes.

Modern payroll taxes are 12.4% for Social Security and 2.9% for Medicare, equaling a total of 15.3%, compared to the 11.7% in 1977.

Keep in mind, these taxes are regressive, and it is estimated that this average worker would pay 10.1% in modern years, according to the Urban-Brookings tax policy center. When payroll taxes are factored in, middle class Americans today actually pay slightly more.

As for a low earner, making $10,000/year would require them to pay 10.7% in income taxes today, versus only 2.3% in 1977 due largely to the 0% bracket. Of course, adding the regressive payroll tax to this will make the situation far more severe.

The top income tax bracket of 70%, versus today’s 39.6%, ensures high earners pay far less. In addition, the Corporate and Capital gains taxes have all seen reductions since then, and our 74,000 page tax code has a variety of deductibles and tax loopholes that only the wealthy can utilize; the alternative minimum tax (AMT) is being used more often now than ever before and is significantly lower than the top income tax rates.

Thus, there are a few points to be made.

First off, the evolution of American tax brackets and rise of payroll taxes has led to income inequality, but not because of the factually inaccurate narrative of the left. For that matter, we can’t say the tax cuts for the rich are bad, especially considering the first Reagan cuts for the rich actually generated more revenue. Reagan cut the top income tax rate from 70 to 50% in 1981, and five years later after the dust settled, government revenues were up by 28.4%, outpacing inflation at 20.6% (Of course, Reagan did get in trouble by overspending and tripling the national debt, but that’s another story).

Increased free trade

Obviously, the TPP was scrapped by Trump, so we’ll have to limit our focus to NAFTA and CAFTA. First off, there needs to be direct evidence of a net job loss for us to conclude that more free trade and lower tariffs have caused income inequality. Not only that, but we also have to look at changes in wages.

First, wages actually saw a minor increase in the US, Canada and Mexico as a result of NAFTA. The increases ranged from 0.2% to 1.3% when accounting for inflation. That sounds fairly insignificant, but considering the fact that wages for the bottom 60% of Americans have faced stagnation or stagflation over the past forty years, a slight 0.2% increase in wages for blue-collar America isn’t so slight in comparison. It is also worth noting that real wages for all three bottom quintiles hit all-time highs in real income in 1999 and 2000 when trade with our neighbors was thriving and proliferating, and jobs supported by exports on average paid 13 to 16 percent more than other US jobs.

Secondly, NAFTA caused net job growth, not loss. That’s not to say not a single job was relocated, but fewer regulations, lower tariffs and substantially higher private investment spending worked wonders for the American economy. A five year analysis by the department of commerce concluded that NAFTA supported 600,000 more jobs.

Economist Charles Wheelan pointed out that from 1990 to 1997, the US lost 37,000 jobs a year due to trade with Mexico; yet, at the same time, offset that by gaining 200,000 per month largely due to foreign trade.

The first six years of NAFTA, Unemployment dropped from 6.6% to 4% and workforce participation jumped from 66.6% to 67.3%.

Despite this rapid economic expansion, prices were extremely stable. In December of 1993, the month prior to NAFTA taking effect, inflation was a healthy 2.7 percent, and by January of 2000, six years after NAFTA began, inflation was measured to be 2.7 percent. During that six-year span, inflation stayed between 1.3 and 3.3 percent for every single month.

“Crony Capitalism”

Crony capitalism was one of the buzzwords of the election cycle, mostly in reference to government subsidies, bailouts and general favoritism for the rich.

Bernie Sanders was quite off the mark on most topics pertaining to the economy and was an expert at fear mongering over free market agendas, as well as fabricating facts. That said, a broken clock is still correct twice a day. When he came out in opposition to the 2008 Wall Street bailouts, he supported an idea that is actually very capitalist. So yes, the $700 billion bailout that was never fully paid back and only really protected Fanny Mae, Goldman Sachs and Freddie Mac shareholders, the $83 billion annual subsidy disguised as a liability discount for large banks and the hundreds of billions of dollars given away to the coal and oil industries all hold a few things in common.

First, they play a major role in moving wealth from tax payers, depositors, homeowners and energy workers at the middle and bottom of the income spectrum to the shareholders, investors, lobbyists and oil tycoons at the top.

Second, and most importantly, they aren’t at all free market ideas.

In all the literature and publications surrounding Austrian economics, libertarian thought or the Chicago school of economics was there ever a platform of support for public influence in the private sector?

Ron Paul, Walter E Williams, Ayn Rand, Milton Friedman, John Stossel, Arvin Vohra, Tom Woods, Murray Rothbard, Julie Borowski – name your favorite libertarian activist or intellectual and you’ll notice that you won’t find any support for government choosing the winners and losers of the market place via excessive taxation, regulation, subsidization.

Thus, crony capitalism isn’t capitalism at all, and turning on the bankers rather than the crooked federal government that enables them is moderately counterproductive.

A better term is crony socialism, considering that it both requires taxing and spending and leads to the redistribution of wealth, it can therefore be determined that raiding the United States social security treasury, grabbing funds from discretionary spending or collecting a little bit extra in taxes to pay off the mistakes of a coal company or insurance company isn’t neo-liberal.

Conclusion

It’s fair to say that the vast majority of the leftist rhetoric on the income gap between the rich and poor is very incorrect. The policies they blame for income and wealth inequality, such as changes in income taxes or corporate welfare, are innately not neo-liberal or free market; in addition they’re still completely incorrect on issues like free trade. I will offer my remedy to our economy, not to income inequality specifically, but to lack of economic growth among the lower class.

First: A complete revision of the tax code.

That means tearing up the pre-existing code from scratch. Social security should be privatized and the regressive payroll tax trashed; remaining funds should be given back to people that paid into it in the form as a check from the government.

The new tax code should have a massive income tax deductible and no more than four brackets that should all experience major reductions.

Next, the government should end corporate welfare altogether. Subsidies to corn syrup, oil, coal, and everything in between should be cut entirely and Wall Street shouldn’t expect another bailout in the future. Let the free market work.

After that, the government should focus on signing and ratifying more common-sense free trade deals, perhaps targeting Asia, Africa and South America. There’s insurmountable evidence that free trade deals are beneficial towards all countries involved.

Finally, the government should end mass incarceration, as it’s simply illogical for 2.2 million people (that could join our workforce) to be behind bars for petty and victimless crimes. A very large number of these people have been given astonishingly harsh sentences or are in prison for drug usage.

These are a few steps that could most certainly be taken.

Ultimately, it’s rather ignorant to believe that neo-liberalism is the perpetrator of wealth inequality across the globe.

I would actually go far enough to say that most true liberals, if there are any left, would actually agree with fighting this crony socialism, the logical second step would be to point out that all socialism, democratic or national, is crony, unsuccessful and unfair in nature.

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Jake Dorsch

Jake Dorsch is a libertarian activist, bank teller, investor and aspiring future economist from Green Bay, Wisconsin that is pursuing a bachelor’s degree in both political science and quantitative economics at Drake University. He is currently on track to graduate a year early and will likely continue to obtain a master’s degree in econometrics.

5 COMMENTS

  1. Mr Dorsch, you make some fine points but unfortunately you avoid the topic of income inequality. If one asks the typical liberal or progressive then the answer is obvious, the very few rich has far too much and the great many poor do not have enough and that is a moral wrong. Of course this means that there is no right answer to income inequality that the total redistribution of wealth in a society. Further, the left really is stupid when trying to understand trade, capital for start-ups, and just what profits really are. When one hears the term “income inequality” than one must automatically focus on the real meaning of that term, equality of outcome. Once put in its proper perspective one can proceed to discuss the term intelligently. That is, the distribution of income is unequal for a number of reasons, few of which have a moral basis. We may talk about the distribution of wealth in terms of the Pareto distribution where 20% of the population acquires 80% of the wealth and resources in any society (it is a mathematical concept that has been proved and operates regardless of social interference – even in the USSR the Pareto distribution was “obeyed”), or we can talk about other statistical distributions (the standard Bell curve comes to mind) which have never yielded to any social or political pressures in the past, including Marxism.

    And one can certainly talk about personal choices that individuals make in their lives and the consequences that are incurred. Indeed, one can speak to individual choices and show that the rich are not immoral monsters but generally employers of other individuals, both collectively and individually. That is the power of capitalism, is it not? So why become bogged down in a moral pissing match? Certainly the choice of one’s college degree is not a very moral one, it is really amoral. Becoming an accountant is neither more or less moral that becoming a social worker. And it the one is willing to accept lower wages, is that acceptance a moral evil? Do you begin to see how the argument goes? The individual choices we make in life do not assure any type of equality of outcome and never have. We have the freedom to make any choices we may choose. And we should accept the consequences for those decisions.

    • This is probably the most intelligent, well written comment on any media website ever. I don’t disagree with you, individual decisions have enormous impacts on wages. Overall, I think Americans are financially illiterate and horrible at investing, spending and saving. The point of the article, however, was more of a public policy approach and a rejection of the incorrect leftist narrative that free market government policies are responsible for income inequality, or as you put it, inequality of outcome. I’m fairly certain you would agree with that statement.

      I think the right answer is to helping the middle and lower classes grow is actually to have two responses. The public approach is to move this country to a more capitalist form: eliminate payroll taxes, cut spending, cut income taxes, sign free trade deals, legalize and tax drugs, end corporate welfare and so on. (Things I also assume you would agree with) The other response is to educate people. We need people to realize the repercussions of massive credit card debt, a poor credit score, investments in non-interest bearing checking accounts, useless college degrees and so on. I don’t expect either of those things to happen, but if they do, you can expect the economic welfare of the bottom 75% of Americans to thrive better than it has since the days of Calvin Coolidge.

      • I agree, more or less with your first paragraph. But let us say that most individuals in this world are very ignorant when it comes to finance as well as recognizing the consequences of their actions. Call it the problem of the distribution curve of life, 68% will find it difficult to obtain a clue in life.

        But I am in disagreement with your second paragraph. Capitalism is a misunderstood concept. It is a rather simple construction that even in the heyday of the old USSR the proletariat often followed. One saves income for future investment in economic activity that will increase future income. Even the act of saving part of one’s wages to buy a little extra at the state run store so that one could do a little black market trading is part of that essence of capitalism since it engenders the economic theory of supply and demand as a means of distribution of wealth, goods and services, and income.

        There is a great debate at the moment that questions the idea of “Free Trade” and “economic comparative advantage”. Granted, it is not a widespread public debate, but questions are asked and proofs are demanded. A good many individuals fail to understand taxation. Many see it as government theft, some see it as income redistribution. The reality is that government is a going concern that must be used for the good of society. That might seem to be a tall order and given the population growth in this world, almost an impossible one. But Ayn Rand was wrong about the motivation that drives society. We are group animals, we rely on groups for our well being. And one of the hallmarks of successful groups, both animal and human, is cooperation among members of the group. Humans can extend group membership beyond the normal range (approximately 160 individuals is the natural limit) but the invention of external structures. We often refer to these structures as political necessities. The family group expands to include friends and neighbors and associates removed at some distance. But this expansion extracts a price and that price is tax, a cost of governing a wider expanse of individuals and groups. This is the “policy” that the “Left” has misconstrued. Of course the other great invention has been the idea of “Law”, the governing of the affairs of both individuals and groups. When groups are very small, extended families, the laws are often unwritten but understood. Most are based on cooperation. But the larger the group, the more complexity is introduced into society and the need for more formal laws. Unfortunately, law is a concept, an ideal, and never something that is explicitly black and white. Hence, laws are often incomplete or ambiguous. So when one begins to think about “improving” society one must take this political fact into consideration. Much of what you suggest is unwieldy and indiscriminate. Rand thought greed the highest moral good, but greed is more about acquisition than it is about growth. Growth expands our economic and social possibilities, greed inhibits them. Unfortunately we then introduce what we believe are moral precepts but are little more than immoral anti-behaviors. This is where most modern moral philosophers of the twentieth and twenty first centuries have got it extremely wrong. Morality is based on other worldliness, a belief on a deity or other supreme power beyond the realm of general mankind. This is why the morality of communism failed. Morality based solely on human behavior is bound to fail. That is why we so often look beyond ourselves, beyond our known world, and seek what is known imperfectly. And we destroy our religions, our social constructions when we seek perfect knowledge of our gods and ideals. Plato was right to say that our ideals, in order to remain ideals, could not be perfectly known. Once we destroy the illusions we are lost, tossed like the debris on an angry sea.

        I hope my missive gives you pause for thought.

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