The Inevitable Progression of Inequality

A recent article published by the Nation of Change website praised Vice President Kamala Harris’ endorsement of a wealth tax to address, “the widening wealth gap in the country, particularly as billionaires continue to amass vast fortunes while millions of Americans struggle financially.” And as a Senate candidate in 2016, Ms. Harris stated, “Income inequality is the defining economic challenge of our time.” Many of the policies promoted by the Harris campaign, from an increase in the capital gains tax, a corporate tax increase, controls on price-gouging grocery stores and, of course, a wealth tax on unrealized gains, are aimed at addressing income inequality.

And Donald Trump has been accused of increasing income inequality through his “tax cuts for the wealthy” despite the fact that the level of people living in poverty reached a record low during his administration. But income inequality has always been with us. Not only that, but as Walter Scheidel writes in his book, the Great Leveler, over thousands of years in all types of polities, income inequality and the wealth gap tend to increase over time. Elites throughout history have entrenched themselves and then enriched themselves. The only thing that Mr. Scheidel found to alter this inexorable increase in inequality was some great catastrophe such as war, famine or plague that decimated the population and forced a restructuring of the economies of those afflicted societies as I described in my 2017 commentary, I Dream of Gini.

But the omnipresence of income inequality throughout history does not stop politicians in our time from denouncing greedy capitalists for the disparity and promising to make them pay “their fair share,” whatever that might be. But as Ruchir Sharma writes in his book, What Went Wrong with Capitalism (2024), greedy capitalists may not be to blame for all this income inequality. Mr. Sharma points the finger at the government, the same government that people want to force billionaires to pay their “fair share” but which actually plays a major role in exacerbating the wealth gap. And recently the chief culprit in aggravating this problem is the Federal Reserve.

Ever since the 1970s, the US government has been trying to goose the economy through deficit spending. In 1977 the Congress amended the Federal Reserve Act to require the Fed to "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates," effectively making the Fed a coconspirator with the US government in this plan based on a mutated form of Keynesian economic theory. The US government has had deficits every year since except from 1998 to 2001. Since the Great Recession in 2008 budget deficits have skyrocketed and the Fed accommodated all this deficit spending by lowering interest rates to near zero and also buying government bonds, known as quantitative easing which shoves money into the economy as the Fed buys assets ballooning the Fed balance sheet to $9 trillion in 2022.

All this easy money and quantitative easing pushed money into the financial system in an attempt to spur economic growth but instead of goosing the economy the Fed goosed asset prices. In 1977 financial assets in the US were 197 percent of GDP. By 2024 financial assets had exploded to 492% of GDP. All the money the Fed was shoving into the economy was going into stocks and bonds and not into plant and equipment. Equity markets have quadrupled over the last 25 years even as the number of listed public companies has declined.

So, what does all this have to do with income inequality? Keep in mind that stocks make up 85-90% of executive compensation in the C Suite. Generally, I have no problem with that. The salaries of CEOs and other top executives should be tied to stock performance. But stock performance should be tied to how the companies are doing, not how much the Fed is inflating stock prices through quantitative easing.

Creating a socialist society does not eliminate income inequality, it just changes who the elites are. And because socialist economies are unproductive, everybody is poorer  - including the elites. Transfer payments and social welfare are just Band-Aids that also discourage economic growth and makes people poorer -except government bureaucrats. So if our political leaders really want to do something meaningful about income inequality they could start by reining in the Fed and telling the Congress and the President to balance the budget.