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Rambling Economy Series: Why Inequality Is Caused By Government Policies

Inequality has become a prevalent issue in America as the top 1 percent continue to gain a larger share of total wealth and the middle and working class Americans see wages remain the same. There are a plethora of reasons for inequality and too many to be determined by economic analysis, but we can pick out ones that seem to have the largest influence on inequality. I believe that it is absolutely essential to be reminded that one constant in the economy is human nature. Therefore, I find arguments that suggest inequality is caused simply by the wealthy becoming greedier or by CEOs wanting to get paid more far too simplistic. There must be changes in regulation or reasons for societal changes that lead to the one percent being greedier, because, even dating back to Adam Smith; the wealthy have always been greedy.

One large force that I believe has spread inequality since looser policies beginning around the 1980's is the Federal Reserve. There are many ways in which this occurs, but, put simply, the Federal Reserve raises asset prices in order to achieve what they call the "wealth effect". The wealth effect is the idea that increasing asset prices above fundamental levels will stimulate consumption by making people feel richer. The issue with this is that the wealthy generally hold the majority of assets (specifically equities) and therefore receive the largest portion of the wealth effect. The wealthy often pressure the Fed to continue with loose policies because they enjoy watching their wealth increase. This presents a natural bias for the Fed to continue helping Wall Street while Main Street sees no improvement. Ending programs such as quantitative easing and low-interest rates, which favor the wealthy and the banking industry, will immediately help inequality.

The second force is the stagnant wages of the middle class. There have been many studies put out suggesting that education levels of most Americans has not improved since the 1950's and has possibly even gotten worse. There should be no expectation to see wages improve if, in fact, there are no gains in productivity. However, Freeman says that productivity has improved while wages are stagnant. He suggests this is because of a measuring inconsistency by the CPS survey, but I find that argument lacking. I believe that if productivity is truly improving then there is another force that is making labor more expensive. This is likely caused by regulatory changes, such as requiring benefits or licenses or making it harder to hire or fire. For instance, in the banking industry there is a huge regulatory burden with each new employee and with beginning any sort of financial institution. If regulatory burdens have risen equal to productivity, then stagnant wages should be expected. The solution, then, is to get rid of regulatory burdens on employers. The government's natural solution to issues in the labor markets is to have greater regulation. This regulation, however, causes even more problems and then more government regulation until there is a cycle of regulation and problems that lead to a huge regulatory burden on employers.

One argument that people often make is that the government should subsidize education more in order to increase productivity. I believe there is a natural tendency for government to spend far too much on education. When was the last time you heard a politician suggest spending less on education? It just doesn't happen. Every elected official wants to direct more taxpayer dollars toward education because voters like to hear that. However, at some point, and this point was likely a long while ago, the returns to further investment is basically nothing. The government is simply throwing more money at a broken machine. The government directs the public education system curriculum through basing payments toward schools on how well they do on government-administered tests. Therefore, the curriculum does not suit the wants and desires of the students like a private enterprise would, but rather suits the wants or opinions of the government. This isn't meant to suggest that the government is full of propaganda or brainwashing our children, claims like this are ridiculous. I am suggesting that government institutions are simply natural inclined to not fulfill the wants of the consumers like a private enterprise because they do not have the same profit incentive. The private school in my town began using iPads to educate students because they believed there was an advantage to this and they believed that this would give them a competitive advantage over other schools. The public school followed with the same initiative about three years after the private school. This shows the lack of a profit incentive causes the lack of innovation and fulfillment of the consumer's needs.

Therefore, what I suggest is privatizing education; students have more choice over school and curriculum than ever before. Student can choose the type of school that suits their learning style the best. There would be charity taxes to pay for lower class areas or volunteer teachers where they may not be able to afford an education. There would be no need for government-mandated taxes.

I think one regulation that has had a huge impact on inequality and the lack of education is the minimum wage. This regulation forces people who produce under the minimum wage out of the labor market and instead of being productive members of society and gaining on job training, they live off of welfare.

Overall, I believe that is important to focus on areas where the US can deregulate rather than putting more regulations on top of the regulation we already have and we end up with even higher unemployment rates like in highly regulated countries like Spain. Regulatory burdens put a damper on wages and education is essential to fixing inequality, but we cannot simply throw money at it. The natural bias of government is adding regulation, when in fact the opposite should be done.