Inequality impacts life and policy

Rate	Price	Duration
One Day	$1.50	for 1 day
4 Weeks	$18.80	for 28 days
12 Weeks	$56.40	for 84 days
24 Weeks	$112.80	for 168 days
52 Weeks	$244.40	for 365 days

Rate	Price	Duration
One Day	$1.50	for 1 day
4 Weeks	$18.80	for 28 days
12 Weeks	$56.40	for 84 days
24 Weeks	$112.80	for 168 days
52 Weeks	$244.40	for 365 days

Income and wealth inequalities are well-known problems in our economy. Income inequality in the US is extreme. We’re the most unequal of nations among all developed nations. Because of this inequality, one in five U.S. families, in 2021, was forced to live on an income that averaged just $14,859 per year, an income that is $56,020 below the average family income of $70.879 in 2021.

It’s this persistent low income (only 2.9 percent of all earned income goes to the bottom 20 percent) that generates our high level of wealth inequality. The bottom half of income earners in 2022 controlled 3.3 percent of the net wealth in the US, this compares to the 30.6 percent of net wealth held by the top 1 percent of income earners.

The quality of one’s life is largely dependent upon family income, and the ability of families to weather the vagaries of the business cycle and to retire with an adequate income is dependent upon wealth, both financial and nonfinancial. Therefore, unless we can make substantial changes in how we distribute earned income, we’re condemning the bottom fifth of the families in the US to life of poverty (or near it) and an old age that is either devoid of retirement, or a retirement marred by poverty.

Our economic system, mistakenly called capitalism, is really a mixed system with public sector spending being responsible for, on average, 25.5 percent of GDP. Within capitalism there are no mechanisms to generate a relatively equal distribution of income, or simply a distribution of income that corresponds to a worker’s contribution to productivity. Thus, the job of creating a middle class, by creating a more equal distribution of income, falls to the federal government, but this goal is made more difficult by extreme income inequality.

Macroeconomic policy is relatively straightforward, during recessions, or when the federal government wants to implement new social programs, the federal government pursues expansionary fiscal policies (cutting taxes and increasing government expenditures). The Federal Reserve pursues expansionary monetary policies (lowering interest rates).

During periods when inflation is high, or when the federal government wants to redirect resources to alternative purposes or goals, the federal government and the Federal Reserve reverse their policies. The federal government pursues contractionary fiscal policies (raising taxes and cutting expenditures). The Federal Reserve pursues contractionary monetary policies (raising interest rates).

In theory the distribution of income does not come into play because there is no assumption that the distribution is unequal to a degree that it would impact policy outcomes. Unfortunately, the high degree of income and wealth inequality has a big impact on which policy tools can be used, and the economic impact the remaining tools have.

For example, the federal government no longer uses federal income taxes as a policy tool to end a recession or to restrain inflation. Tax cuts to stimulate the economy tend to be largely ineffective because most of the tax reductions would go to the top 20 percent of income earners who pay 66.5 percent of all taxes and have an average income of $254,449. Marginal rate cuts for the wealthy won’t stimulate demand given the size of their current income, and tax cuts to the bottom 60 percent of families will be too small, in terms of absolute dollars, to move the economy.

Fed policies to fight inflation, depend on interest rate hikes to reduce consumer demand. Here again, income inequality generates outcomes that differ radically by income class. Raising the interest rate for home mortgages or auto loans would have little impact on families making income in excess of $250,000. But for the bottom 40 percent of families whose income averages only $27,034, even modest interest rate hikes are devastating, but the overall impact on the economy will not be as effective as we might hope unless rates are pushed to higher levels.

As income inequality has increased so has the need for income assistance and social programs, but unequal incomes (and the way our political system is financed) allow for unequal access to political leaders resulting in a situation where those with adequate incomes don’t feel the need to push politically to help finance social programs they themselves do not need.

Societies with relatively equal incomes can afford a limited government. But as income inequality grows, the need for income assistance and social programs grows resulting in the need for an expanded public sector. If we want limited government, then we must find a way to redirect a larger share of earned income to those at the bottom of the income ladder so that an elaborate social welfare system is not needed. This was one of the reasons that Milton Friedman favored a guaranteed annual income.