Economic inequality, depending on your interpretation of various datasets, has increased in the last 30 years.
The degree of economic inequality in the United States is hotly debated, but it does exist even with the most conservative calculations. If we want to reduce inequality, pro-market policies that promote growth are more effective than heavy-handed taxation and redistribution.
Occupational licensing and trade organizations are barriers to entry for low-income people seeking to build human capital and income. There are cases in which occupational licensing protects consumers, but they mostly cause higher prices via restrictions on labor supply.
In 2008, nearly 30 percent of the workforce required a license - up from 10 percent in 1970. States with heavy occupational licensing actually experienced slower employment growth than states without the same regulations.
Economists estimate that licenses reduce the number of jobs by two million. Moreover, supply-side labor restrictions impose annual costs on consumers of $200 billion. As the FTC once testified, they do not contribute to any noticeable improvement in quality of services and instead hinder competition via entry prohibitions.
Restrictions on labor and resulting higher prices create losses for low-income earners that contribute to inequality.
Expanded access to capital markets will increase the likelihood that all income earners accumulate wealth during their lifetime. In our current marketplace, government policy makes it advantageous for wealthy investors to realize extremely high returns at little cost.
The Federal Reserve’s zero-interest rate policy enabled abnormally high returns on capital by artificially suppressing the cost of money. Investments are made that might otherwise be considered unprofitable due to a higher interest rate. Subsequently, wealthy investors are able to earn larger returns in markets not available to middle class investors. Economist Joseph Stiglitz reached the same conclusion that zero-interest rates favors creditors instead of debtors, thus increasing inequality.
Public retirement spending acts a substitution for private wealth accumulation. While it may be effective at helping the poorest individuals, many would benefit from opting out of social security. From an investment standpoint, social security subsidizes low-risk assets for wealthy investors and allows them to make higher risk investments that gain higher returns. Middle class families and young professionals, however, find themselves trapped in a low-return investment.
Research has shown that net wealth in lower wealth households decreases by 20 percent for every one percent increase in state pension expenditures as a share of GDP. For wealthier households, that effect is just above 10 percent due to higher portfolio returns.
Besides capital investment markets, lower and middle income earners are strained by the burdens of confiscatory taxation. Lowering taxes would do a great service to address economic inequality.
The average single filer earns $48K, but carries $8K in tax liability. Such a substantial sum of money could be used productively for other purposes. Many single filers are young people and this tax burden reduces their savings and investing over the long run. High income taxes have a negative effect on savings rates. This is adversely true for middle and low income earners.
Policies meant to curb inequality should focus on lifting up lower incomes instead of dragging down higher incomes. Wealth is not multiplied by dividing it, but rather created through the productive use of resources. Restricting the supply of labor and regulating the flow of capital is neither a productive allocation of resources nor an effective means of reducing inequality.