Income Inequality: A Free Market Economists Blind-Spot

MUNCIE, Indiana – The late economist Edgar Fiedler had a way of poking fun at economists and it’s always funnier when a professional is the one cracking jokes about his own profession. Two of my favorite quotes are: “He who lives by the crystal ball soon learns to eat ground glass.”; and “Ask five economists and you’ll get five different answers – six if one went to Harvard.”

Mr. Fiedler was obviously poking fun at a profession (really more like a philosophy) which is built upon trying to predict how certain policies will impact our capitalist economy. Depending on what side of the aisle you listen to (and I prefer both sides), you’ll hear the free market thinker clamoring against government intervention – markets will correct themselves.

Those who follow Keynes encourage government intervention, especially during a contracting business cycle like ours – commonly called a recession.

However, what we’ve experienced since 2008 is anything but typical. We’ve tried both solutions, but neither on has worked.

Even though Congress has been forced through sequestration to adhere to austere measures, the Federal Reserve has been stimulating the economy to the tune of $85 billion a month with massive purchases of assets from the financial sector known as Quantitative Easing. This has helped Wall Street and the housing market, yet with $4 trillion being pumped into the economy, there is no inflation – interest rates are zero – with that much money/liquidity being pumped into our economy, it should be exploding with inflation.

So, what’s the problem?

Let’s give first crack to our local expert free market economist since he returned from a conference with apparently other free market economists. Michael Hicks, director of the Center for Business and Economic Research and an associate professor of economics at Ball State University, recently wrote a letter picked up by the Indiana Economic Digest, which states, “With $4 trillion in asset purchases and abysmal labor markets, we are all worried. Despite what you may hear, among people who have spent a lifetime studying these matters, there are no obvious or easy solutions to our problems.”

Although he did offer a hint to what all those attending his conference “agree upon conclusively”:

1. The 2008-09 stimulus bill has disincentivized work and led people to choose leisure over labor.
2. Too many benefits to workers via higher minimum wages, long-term unemployment and expansions of food stamps (SNAP).
3. Moreover, no matter what anyone thinks of the ultimate wisdom of the health care legislation, it could not have been more unfortunately timed.

I’m not sure about how our readers will see it, but I think Mike and his colleagues are saying that workers are choosing to play X-box over working because their unemployment benefits have been extended for too long and they’re getting free food, but worst of all, now they’re getting free health insurance.

Or to be blunt, “We really have no idea why our economy is flat, but lazy Americans must be the cause of it.”

Muncie Voice has consistently referred to studies showing how the past 30 years, our system of capitalism has done very well for the 1%, without question. Every single chart on income inequality or wealth disparity, all point to the same thing – our economic system is working for a fraction of 1% of the population, but has failed the other 99%.

In a recent report from the United Nations Conference on Trade and Development (UNCTAD), they argued that “excessive concentration of income was one of the factors leading to the global crisis as it was linked to perverse incentives for the top income earners and to high indebtedness in other income groups.” The report’s author, UNCTAD’s director of globalization and development strategies Heiner Flassbeck, has since argued that there will be no recovery while “income inequalities continue to rise.”

It would seem like the United Nations gets it. Who else gets it?

A Jesuit priest perhaps. Well, this priest has Wharton School of Finance credentials before he entered the realm of the spirit. Father James Martin suggests three ways to solve our problems:

1. Educate yourself. Did you know that income inequality in the United States is getting worse, not better? Despite worldwide increases in technology and productivity, the gap has only widened over the last 40 years…three decades ago, CEOs in the United States were paid 42 times as much as the average U.S. worker. Today they earn 354 times as much. Educating yourself with simple facts like these can help raise your consciousness, make you more alert to income inequalities in your workplace, and help you in the voting booth.
2. Pay a just wage. That sounds pretty obvious. And most of us might say, “Pay me a just wage!” But, if you’re in a decision-making position within your company, you might ask yourself a version of the Golden Rule. “Are you paying your employees what yourself would want to be paid for that job?”
3. Honor human dignity. What does this have to do with income inequality? A lot. You saw that figure about CEO’s earning 354 times as much as the average U.S. worker. From my experience in the corporate world, I can say this disparity sometimes makes people on top feel they’re 354 times better, or 354 times more valuable, or 354 times more important, than the average worker…but in my few years in the corporate world I saw countless examples of people being treated like trash, with less of the dignity they deserve as children of God. The person may work for you, but they belong to God.

So yes, even a Jesuit priest gets it.

However, why can’t a group of free market economists, or “people who have spent a lifetime studying these matters”, reach the same obvious conclusion?

It’s simple really, income inequality is a blind spot for free market economists. Admitting that our system of capitalism is flawed would mean all those “years of study” was for nothing. We can’t tell Mr. Koch that his ideology is flawed, so it must be lazy Americans who demand too much pay and want health insurance benefits. You can almost hear the keyboards at Koch enterprises to ALEC to our statehouse in Indiana – cut unemployment benefits, lower the minimum wage and kill Obamacare.

Denial or blind spots may help them cope with reality, but it’s only a matter of time before they’ll be savoring the taste of ground crystal glass.