And so it goes with housing. The highly regulated—and Federal Reserve fiat currency fueled—housing market has seen prices skyrocket well ahead of overall inflation, contributing to the average age of first time home buyers to increase from between 25 and 34 in 1981 to 44 today. Real estate price hikes are of course especially acute in large cities where housing regulations become more numerous and complex.
For instance, San Francisco has become the second most expensive city in the U.S. to live courtesy of strict property zoning restrictions that help make it unaffordable for the non-rich to live there. As reported by the Stanford Daily in 2018, San Francisco imposes a “rigid collection of ultra-restrictive zoning laws,” which, according to the Daily, have played an “indisputable and well-documented” role in the city’s housing crisis.
But to politicians, admitting failure of government efforts to make things more affordable is never an option. Instead, they insist on doubling down on government interventions.
In the article, Castro tells us there is “good reason” for the Biden administration to declare “equity in housing a top priority.”
In addition to the current crisis of millions of people being behind on rent thanks to government shutdowns over the past year, Castro informs the reader that “we need to tackle the underlying housing crisis that left more than 1 million Americans without a permanent home even before the pandemic.”
As is virtually always the case, when a politician or bureaucrat says “we” need to address something, they mean the government.
In this case, Castro insists that “lawmakers have failed to adequately invest in affordable housing.”
To address the “crisis” in affordable housing, Castro continues, “we need to pair investments with policies such as a renter’s tax credit, universal housing vouchers, direct relief checks and full enforcement of the Fair Housing Act.”
While the renter’s tax credit would be new—and all tax credits should be welcome—the rest of Castro’s recommendations largely double down on government policies that make affordable housing more scarce rather than abundant.
Affordable housing programs typically involve either financial assistance to renters/buyers or zoning rules forcing developers to sell a certain percentage of their new units at below-market prices.
Such policies work to drive up housing prices and restrict supply.
Financial assistance to renters or buyers of housing artificially props up demand for housing. Such programs inject more money into the housing market, which drives up prices.
Meanwhile, affordable housing zoning requirements mandating that a percentage of units be sold at below-market prices discourage new development, restricting the supply of housing—which drives up prices.
Higher prices not only put housing out of reach for the poor, they also place undue financial strain on the middle class. In a study of low-income housing mandates in the San Francisco Bay Area from 2003 to 2007, economists Benjamin Powell and Edward Stringham found that new home construction fell by an average of 30 percent in the first year, resulting in an average 8 percent increase in housing prices.
More specifically, as reported in this 2016 Los Angeles Times article, “In a study looking at Southern California, Stringham and Powell found that housing starts in eight cities dropped off significantly after the inclusionary zoning went into effect. In the seven years before the law, over 28,000 new homes were built. In the seven years after? Only 11,000. Yes, 770 ‘affordable’ units were constructed, but what’s more important is the 17,000 homes that weren’t built at all, making the housing shortage more acute and pushing up prices.”
It’s the classic case of the “seen vs. the unseen.” The government mandates may produce some affordable housing units, but the incentives of the regulations cause a far more significant, but harder to detect, decline in overall housing starts.
Moreover, if such mandates don’t lower new housing starts, low income housing mandates prompt developers to raise prices on the remaining houses to make up for the lost revenue from the share of houses they are forced to sell or rent at below-market rates. Thus, the real impact of affordable housing policies is less, not more, affordable housing.
As Ludwig von Mises taught us, government intervention begets more intervention. When politicians interfere in the market in order to “improve” outcomes, the intervention not only fails to improve the situation, but makes matters worse, and often creates still more problems.
In order to address these negative consequences, government imposes still more interventions, which exacerbates the problems further. And the cycle repeats.
Such is the case time and again with government efforts to make goods or services more “affordable.”
The answer to the nation’s affordable housing problem doesn’t lie with still more government interference, but rather a removal of the government interventions causing the problems in the first place.
Oregon became the first state to decriminalize possession of otherwise illegal drugs. According to this Feb. 1 Associated Press article, “Police in Oregon can no longer arrest someone for possession of small amounts of heroin, methamphetamine, LSD, oxycodone and other drugs as a ballot measure that decriminalized them took effect on Monday.”
Instead of being arrested, those found in possession “would face a $100 fine or a health assessment that could lead to addiction counseling.”
That such a measure was approved by Oregon voters is an encouraging sign that more people are waking up to the illiberal and destructive War on Drugs.
“Today, the first domino of our cruel and inhumane war on drugs has fallen, setting off what we expect to be a cascade of other efforts centering health over criminalization,” executive director of the Drug Policy Alliance Kassandra Frederique was quoted as saying.
Turning drug users into criminals destroys people’s lives—people who otherwise did not aggress against anybody else.
The War on Drugs has torn families apart by incarcerating people (mostly men) whose only “crime” is using or possessing a chemical that the government deemed illegal. Millions of children have had to grow up without a father stuck behind bars for a noncrime.
“Vices are those acts by which a man harms himself or his property,” begins Spooner. Contrast that with his description of actual crimes as “those acts by which one man harms the person or property of another.”
The distinction is clear. “In vices, the very essence of crime—that is, the design to injure the person or property of another—is wanting,” Spooner explained.
If the proper aim of government is restricted to merely “secure these rights” of life, liberty and the pursuit of happiness, clearly the criminalization of vices such as drug use not only exceeds allowable state action, it amounts to an erosion of liberty.
Indeed, for those conservatives who claim to support a “limited government” whose proper role is restricted to protecting its citizens from violations of their rights, a question they will be unable to answer is: “when two people voluntarily agree to exchange money for drugs, whose rights has been violated?”
Instead of making it criminal behavior, drug possession and use should be treated as a health issue, an addiction that needs treatment rather than punishment. Individuals using drugs should not be discarded from society, rather, a just and compassionate society would emphasize rehabilitation of drug users so they can become productive members of the community. Throwing them in a cage for drug possession puts a permanent stain on their record, making it virtually impossible to join the job market once they are released back into the public.
Drug criminalization causes violence, enriches drug lords
Moreover, drug prohibition serves to enrich the drug cartels, as prohibition places a high premium on the commodity due to it being illegal.
Government criminalization of drugs creates violence in the drug trade because, being illegal, drug dealers have no option to appeal to the criminal justice system if they’ve been wronged, so they need to enforce their own system of justice.
Given the dangerous nature of the black market drug trade, it tends to attract people more prone to violence with little else to lose. Violent gang turf wars and cartel rivalries result. Cities and communities are torn apart, often times with innocents getting caught in the crossfire.
Will Legalization Lead To More Drug Addiction and Overdoses?
Supporters of the drug war insist that prohibition, in spite of its downsides, is still a necessary stop against massive widespread drug addiction that would lead to societal rot and despair.
But there’s little evidence this would be the case. Illegal drugs are already readily available in most areas, those interested know where to go, or know a guy who “knows a guy.”
Indeed, according to the AP article, “Portugal’s 2000 decriminalization brought no surge in drug use. Drug deaths fell while the number of people treated for drug addiction in the country rose 20% from 2001 to 2008 then stabilized.”
Legalizing drugs would also provide a higher level of confidence in the ingredients in the drugs being sold. Companies selling drugs could be held liable if they sell tainted drugs that poison their customers—an option not available under the current system.
The war on drugs is a war on freedom. The freedom for human beings to inquire and experiment in order to learn for himself what constitutes vice or virtue tohim. If government is to exist, its functions should be strictly limited to protecting citizens against others violating their rights, not to protect us against our own judgment and actions that don’t aggress against anybody else.
Let’s hope the voters in Oregon have taken a critical first step in ushering in the end of the government’s vicious, immoral and disastrous war on drugs.
There are plenty of sound reasons to oppose government minimum wage laws, but there is one objection making the rounds that is based on bad economics and should be avoided, and that’s the “businesses will pass on the costs to consumers, making cheap goods more expensive” objection.
For instance, a now-deleted tweet by someone claiming that a $15 an hour minimum wage will cause Taco Bell burritos to explode in costs was shot down in short order by the tweet below. Scrolling through the replies also shows hundreds of other similar responses of people sharing the same experience in their cities that already have a $15 an hour minimum wage. Indeed, the responses were so decisive and numerous the original poster deleted his tweet to avoid further embarrassment.
Don’t make the same mistake.
There are two main reasons why the “but tacos or hamburgers at fast food joints will cost $10” argument is easily shot down. First, is because it is bad economics.
In short, if Taco Bell or McDonalds could charge $10 per taco/burger, they already would be, regardless of wages and costs of other inputs. But businesses can’t just unilaterally increase their prices without a response from customers. The law of demand tells us that consumers will demand more of a good at lower prices, and less of a good at higher prices, other things held equal. Taco Bell doesn’t charge $10 for a burrito because customers won’t pay that price.
To illustrate this point, imagine if the government mandated a minimum price of beef at $15 per pound. Burger joints couldn’t just pass on the increased costs to customers. The demand curve for burgers didn’t change. Instead, burger joints would buy less beef.
The mandated increase in beef price did nothing to improve the quality of the beef, nor change the price customers are willing to pay for the finished product it’s used to make. To the extent burger joints still do buy beef; they will need to cut costs elsewhere on other inputs and expenses.
Fast food restaurants will decrease their demand for beef and seek alternatives, maybe instead sell more chicken sandwiches or salads.
Some larger national chains may be able to absorb the added costs of beef by dispersing the spending cuts across many other inputs spread out across thousands of stores, so it would be smaller mom and pop shops that will be hit the hardest.
Now swap ‘low skilled labor’ for beef. Businesses can’t just ‘pass along’ the higher input costs to customers. Government’s artificial raising of the price of an input will decrease the demand for that input, meaning that fewer low-skilled workers will have access to the important first rung of the career ladder.
Businesses will instead seek alternatives, like automated kiosks, that are more economical. Moreover, to the extent that businesses pay the increased minimum wage to employers that can’t be replaced, they will be forced to cut costs elsewhere, perhaps reducing fringe benefits, worker training programs, or even investments in workplace safety.
Moreover, warning against price increases in fast food or other goods provided by minimum wage workers misses the mark and exposes yourself to easy refutation. Changes in the costs of inputs, whether labor, raw materials, durable capital goods or anything else, does not change the demand curve for the finished good for which they are used. So when minimum wages are increased, the change will not be reflected in noticeable price increases, allowing minimum wage advocates to say “see, we raised the minimum wage and McDonald’s hamburgers still only cost a couple buck.”
Secondly, not only can your argument be easily dismissed on economic grounds, to the extent minimum wage advocates accept the faulty notion that increased minimum wages will cause the price of fast food and other low-price goods go increase, they can readily respond by saying they will happily pay a few cents more for a cheeseburger if it means the workers are paid a respectable wage.
Instead, we need to focus on the negative consequences of minimum wages on vulnerable, low-skilled workers, especially minorities. Follow the Horton rule: “attack the right from the right, and the left from the left.”
Not only is focusing on the negative impact minimum wage laws has on low-skilled, especially minority people more economically accurate, it also makes for a much harder argument for progressives to counter. Minimum wage laws end up disproportionately harming the very people its advocates claim to be helping.
Like so many other harmful state interventions, minimum wage laws need to fought and repealed. To be successful, however, opponents must avoid falling into weak and easily refutable arguments.
Probably the most frequently used non-COVID buzzword in 2020 was the term “social justice.” You couldn’t escape it. From the George Floyd protests turned riots, even to the world of sports, the notion of social justice and its key component—equality—was everywhere.
I can just imagine the late great Murray Rothbard cringing upon turning on a basketball game only to see the word “equality” emblazoned on the backs of players’ jerseys.
Egalitarianism, as defined by Dictionary.com, is the “belief in the equality of all people, especially in political, social, or economic life.” So make no mistake, when Rothbard critiqued egalitarianism he had his sights set on the ‘equality’ being espoused by today’s social justice movement.
Even in 1974, Rothbard had identified the fact that ‘equality’ was a rallying cry of the Left, and that few were willing to challenge the supposed moral superiority of such desires.
“In no area has the Left been granted justice and morality as extensively and almost universally as in its espousal of massive equality. It is rare indeed in the United States to find anyone, especially any intellectual, challenging the beauty and goodness of the egalitarian ideal,” he wrote.
Such broad acceptance led Rothbard to declare that “the goal of equality has for too long been treated uncritically and axiomatically as the ethical ideal,” a problem Rothbard set about fixing in his essay.
So, is equality an ethical idea so morally pure that it is beyond questioning?
Rothbard replied to this query; “If an ethical ideal is inherently ‘impractical,’ that is, if it cannot work in practice, then it is a poor ideal and should be discarded forthwith.”
In short, Rothbard insisted there can be no ethical superiority of a nonsensical goal. If the goal of “equality” cannot work because it violates the very nature of man, it should be summarily dismissed.
For the sake of clarity, Rothbard explains just exactly what ‘equality’ means.
“The term has been much invoked but little analyzed. A and B are ‘equal’ if they are identical to each other with respect to a given attribute,” he explained.
For instance, if two people are both exactly six feet tall, they can be said to be equal in height.
As such, Rothbard continues, “There is one and only one way, then, in which any two people can really be ‘equal’ in the fullest sense: they must be identical in all of their attributes.”
Anyone with the faintest acquaintance with reality, however, realizes that the human species, mankind, “is uniquely characterized by a high degree of variety, diversity, differentiation; in short, inequality,” as he noted.
Rothbard adds, “The age-old record of inequality seems to indicate that this variability and diversity is rooted in the biological nature of man.”
Included in these human inequalities and differences are traits like intelligence, ambition, work ethic, skill sets, ability, etc.
To underscore this point, Rothbard quotes biochemist Roger J. Williams from his 1953 book “Free and Unequal”:
Individuals differ from each other even in the minutest details of anatomy and body chemistry and physics; finger and toe prints; microscopic texture of hair…character of brain waves…- and so on almost ad infinitum.
…it is not only possible but certain that every human being possesses by inheritance an exceedingly complex mosaic, composed of thousands of items, which is distinctive for him alone.
In light of this, Rothbard references the “Iron Law of Oligarchy,” the insight that “in every organization or activity, a few (generally the most able and/or the most interested) will end up as leaders, with the mass of membership filling the ranks of followers.”
Rothbard observed that the egalitarians would respond to these emerging societal hierarchies by insisting that “culture,” and not natural human differences, is to blame for such inequalities.
“Since egalitarians begin with the a priori axiom that all people, and hence all groups of peoples, are uniform and equal, it then follows for them that any and all group differences in status, prestige, or authority in society must be the result of unjust ‘oppression’ and irrational ‘discrimination,’” he noted.
Eliminate the supposed institutions that generate said ‘oppression,’ according to the Left egalitarians, and society will achieve the equality of results that social justice demands. Through this reasoning, the egalitarians have convinced themselves that their goal of equality in society is attainable through the means of changing cultural institutions, such as the market economy and the patriarchy.
What the egalitarians fail to recognize, however, is that the institution responsible for society’s greatest oppression is their chosen tool to create ‘equality’: the state.
To be clear, Rothbard by no means assigns all inequality to the diverse and unique nature of individual humans. He, of all people, has pointed out the oppressive nature of the state, and how it dispenses suffering—and favors—in unequal distributions. Calling out the state’s role in creating injustices is a worthy pursuit.
Where the egalitarians go wrong, according to Rothbard, is in their complete dismissal of human diversity to explain any inequality of outcomes, and their willingness to use unjust means to enforce their ideal of a society comprised of undifferentiated and uniform people.
“At the heart of the egalitarian left,” Rothbard wrote, “is the pathological belief that there is no structure of reality,” and further that the egalitarians believe that the reality of human diversity “can be transformed by mere wish” or “the mere exercise of human will.”
Naturally, to impose this “will” of the egalitarians requires an application of violence and coercion from a powerful ruling elite. “An egalitarian society can only hope to achieve its goals by totalitarian methods of coercion,” Rothbard concluded.
This imposition of forced conformity is “anti-human,” according to Rothbard, and therefore the goal of egalitarianism—or equality—is a “revolt” against the biological reality of our uniqueness.
From this, Rothbard is able to dispense his final verdict: “Since their methodology and their goals deny the very structure of humanity and of the universe, the egalitarians are profoundly antihuman; and, therefore, their ideology and their activities may be set down as profoundly evil as well.”
As lawsuits are being filed to challenge the results of this year’s “most important election of our lifetime,” the pundits and talking heads of the political class will repeatedly remind us that election results reflect “the will of the people.”
They couldn’t be more wrong.
There are several reasons why, beginning with the fact that there is no such thing as a singular will of “the people.”
The United States consists of more than 330 million unique individuals with different preferences, priorities, and goals in life. There is no singular “will” of such a large and diverse group of people. The only way a singular “will” of the people can be achieved is if it is imposed from above—by force and threats of violence—in which our overlords override our personal decisions and force compliance to their chosen outcomes.
Moreover, voter turnout—even in this year of projected record turnout—is estimated at about 70 percent for president, with lower totals for down-ballot races. That means that at least 30 percent of the voting-age population did not even vote, either due to apathy or an objection to the available choices. There is no plausible explanation for maintaining that election results somehow reflect the “will” of those that didn’t vote.
And what about the tens of millions of people who voted for a losing candidate? Whether it be president, senator, governor or town council, it is transparently obvious their will is not reflected by the winning candidates they voted against.
Indeed, in politics, a 60% to 40% victory is considered a massive landslide. Such a vote outcome would endlessly be described as giving the winning candidate a “mandate” to carry out his agenda. But in such a case, a full 2/5 of those who bothered to vote are rendered voiceless and impotent over their rights. Their “will” will clearly be ignored.
Thirdly, what about those who did vote for the winning candidate, but that candidate ends up breaking his campaign promises while in office? Votes for candidates promising X but delivering Y can hardly be considered expressing the will of the people. If you vote for a candidate promising to eliminate Obamacare, for instance, and once in office that representative ends up instead voting to expand Obamacare, that politician’s actions could hardly be described as reflecting the will of his own voters, let alone the will of “the people” as a whole.
Most assuredly, political representatives, even after elected, can not represent our interests in any meaningful sense. To be considered a person’s true representative, at minimum these three conditions would need to be met. The representative 1) would be chosen by that person 2) can be dismissed at any time, and 3) can’t act contrary to that person’s wishes (or risk being fired).
When it comes to political representation, none of these conditions hold. A majority vote—not your personal choice—chooses your political representative, you have to wait years before the next opportunity for your political representative to be dismissed, and elected representatives can regularly act contrary to the wishes of up to 49% of voters with little risk of being voted out of office.
Why is this so important?
In his book “Anatomy of the State,” Murray Rothbard pointed out perhaps the more insidious misconception of the State. “With the rise of democracy, the identification of the State with society has been redoubled, until it is common to hear sentiments expressed which violate virtually every tenet of reason and common sense such as, ‘we are the government,’” he wrote.
The use of the collective we, Rothbard noted, has “enabled an ideological camouflage to be thrown over the reality of political life.”
The slogans declaring election outcomes to represent the “will of the people” go hand in glove with the misguided notion of “we are the government” Rothbard warned us about.
No ballot box can conceal the glaring contrast between the rulers and the ruled. Voting merely induces the ruled to believe in the legitimacy of their own servitude.
On the bright side, maybe with so many now questioning the process of counting votes more people will become skeptical of democracy itself, and in turn perhaps rid more people of the misguided notion that “the government is us.”
The U.S. Census made the news recently, as a dispute over the deadline for its data collection made it to the U.S. Supreme Court.
The Trump administration successfully lobbied for a deadline of Friday October 16, over the objections of the National Urban League who instead wanted the deadline extended to the end of October due to COVID-related delays.
The traditional census has been conducted every decade since 1790, as mandated in the Constitution. The population count is used to determine representation in congressional districts for the next 10 years.
The data is also “used to distribute billions of dollars in federal funds for health care, housing programs and education,” as ABC News described.
Local communities emphasize high census response rates so that they aren’t “underrepresented” when it comes to the federal government dole.
But that’s not all. Indeed it’s far from it.
As detailed in this Census Bureau document, the census also asks a litany of other questions of households, including income, sex, age, home value, education attainment, kitchen facilities, number of vehicles available, and dozens more.
The census, however, is just the tip of the iceberg when it comes to government data collection.
As Murray Rothbard wrote even decades ago, “The vast bulk of statistics is gathered and disseminated by government. The overall statistics of the economy, the popular ‘gross national product’ data that permits every economist to be a soothsayer of business conditions, come from government.”
In an essay first published in 1961 by the Foundation for Economic Education, and much more recently re-produced at Mises.org, Rothbard argued that the “burgeoning of government statistics offers several obvious evils to the libertarian.”
Steep Compliance Costs
Forced compliance to the government’s massive apparatus of data collection imposes significant costs, especially burdensome on the nations’ small businesses.
“Private industry, and the private consumer, must bear the burdensome costs of record keeping, filing, and the like, that these statistics demand,” Rothbard wrote. “Not only that; these fixed costs impose a relatively great burden on small business firms, which are ill equipped to handle the mountains of red tape.”
Data collection represents yet another means by which big government hurts the little guy.
While it’s impossible to know the severity of the burden, Rothbard did report on a Hoover Commission task force which found “The chemical industry alone reports that each year it spends $8,850,000 to supply statistical reports demanded by three departments of the Government. The utility industry spends $32,000,000 a year in preparing reports for Government agencies.”
Recall that this data is from an article written in 1961, so today’s burden on businesses will be several multiples higher in dollar terms. The millions (or more) in resources devoted to compliance to government data collection schemes diverts scarce resources that could otherwise be devoted to job creation, capital investment that increases productivity which in turn drives up wages, or research and development devoted to developing new products to improve the lives of consumers.
A Precursor to Fovernment Intervention
Even more nefarious, however, is how government data collection serves as the foundation upon which government intervention and control is built. According to Rothbard:
Not only do statistics gathering and producing go beyond the governmental function of defense of persons and property; not only are economic resources wasted and misallocated, and the taxpayers, industry, small business, and the consumer burdened. But, furthermore, statistics are, in a crucial sense, critical to all interventionist and socialist activities of government.
The data and statistics collected by the government, Rothbard argued, serves as a substitute for market data for government planners. Consumers, for instance, have little need of such statistics. Instead, Rothbard wrote, the consumer uses localized knowledge made available “through advertising, through the information of friends, and through his own experience” in order to understand the markets around him and help inform his decisions.
Likewise, business owners “must also size up his particular market, determine the prices he has to pay for what he buys and charge for what he sells, engage in cost accounting to estimate his costs, and so on.”
None of this activity by consumers and businesses, however, is dependent upon the “statistical facts about the economy ingested by the federal government,” Rothbard noted. Instead, “The businessman, like the consumer, knows and learns about his particular market through his daily experience.”
But government bureaucrats, Rothbard continued, “are in a completely different state of affairs.”
They are decidedly outside the market. Therefore, in order to get ‘into’ the situation that they are trying to plan and reform, they must obtain knowledge that is not personal, day-to-day experience; the only form that such knowledge can take is statistics.
As such, only through the mass gathering of statistics can the government make “even a fitful attempt to plan, regulate, control, or reform various industries—or impose central planning and socialization on the entire economic system,” Rothbard wrote.
Without gathering statistics on various industries, how could it even begin to regulate prices or other aspects of their economic activity? How could the government attempt to “regulate” the business cycle without knowing whether business activity was going up or down?
“Statistics, to repeat, are the eyes and ears of the interventionists,” Rothbard declared. “Cut off those eyes and ears, destroy those crucial guidelines to knowledge, and the whole threat of government intervention is almost completely eliminated.”
Lastly, because perhaps the most common pretext for government intervention into the economy is to “correct” for market failures, if the government were deprived of its data collection, there would no longer even be the slightest “pretense of rationality in government intervention” left.
As a result, Rothbard concludes by suggesting that “the simple and unspectacular abolition of government statistics would probably be the most thorough and most effective” check on government intervention. “Statistics, so vital to statism, its namesake, is also the State’s Achilles’ heel.”
That’s a question USA Today posed to three “policy experts on the left and the right” in this recent article. The responses, while unsurprising, were nevertheless disappointing.
For libertarians, economic inequality itself is not problematic, as long as it is in the context of an unfettered market economy free of government privileges and interference.
Of course, that’s not what we have. But instead of advocating for a more free economy to address inequality, the “experts” consulted by USA Today advocate for more state interference that would likely make inequality worse, while ignoring perhaps the largest source of inequality, the Federal Reserve.
First up is Scott Winship of the American Enterprise Institute, who focuses on income mobility. Winship points out that if every child had equal economic opportunity, then we would see an equal percentage among races of children remaining in the bottom fifth of income when they become adults.
Winship notes that roughly 30% of white children remain in the bottom fifth in adulthood, while the percent for black children exceeds 50%.
Absent from Winship’s observation, however, is the recognition of why this might be the case.
According to Pew Research, 30% of single mothers and their families are living in poverty compared to 8% of married couples and families. In other words, children are nearly four times as likely to be living in poverty in a single mother household compared to a household headed by a married couple. Meanwhile, 58% of black children are living with an unmarried parent, compared to 24% of white children and just 13% of Asian children.
Moreover, the welfare state has facilitated a dramatic rise in single-parent homes. Nationally, since LBJ’s Great Society ratcheted up government welfare programs in the mid-1960s, the rate of unmarried births has tripled.
Single parenthood fueled by the welfare state is an outsized source of inequality, but the welfare state escapes any blame by the “expert” Winship.
To his credit, Winship in his recommendations mentions in passing that “shoring up marriage where it has become an anomaly” would help reduce inequality, but fails to target the welfare state as the major culprit.
His other recommendations include the vague notion of “expanding access to high opportunity neighborhoods,” perhaps a nod to government programs to inject affordable housing projects in middle class suburbs, along with increased government spending on early childhood programs. Encouraging more state involvement in child rearing while ignoring the glaring problem of single parenthood caused in large part by the welfare state sounds like a recipe to exacerbate inequality, not combat it.
Next up is American Compass research director Wells King, who blames growing economic inequality on the fact that the “labor movement has lost power.”
King overlooks basic economic analysis while giving labor unions undeserving credit for boosting worker wages on a broad scale. As Henry Hazlitt wrote, “the blunt truth is that labor unions cannot raise the real wages of all workers.”
As Hazlitt explained, “whenever the unions gain higher wage rates for their own members than free competition would have brought, they can do this only by increasing unemployment,” in that industry, because the above market wage rates decrease employer demand.
As a result, more workers are forced to compete for other nonunionized jobs, and the increased supply of workers in other industries drives down those wages. Therefore, Hazlitt concludes, “All union ‘gains’ (i.e., wage rates above what a competitive free market would have brought) are at the expense of lower wages than otherwise for at least some if not most nonunion workers. The unions cannot raise the average level of real wages; they can at best distort it.”
As Hazlitt explained, King’s calls for a more robust union movement as a means to reduce economic inequality are ill-founded.
Moreover, King’s blinkered focus on unions as being a force for growing worker wages blinds him to a far more potent force driving inequality.
“The steady erosion of unions over the past 50 years has been responsible” for growing inequality, King insists while noting a correlation between declining union membership and growing wealth inequality during that time.
But what else happened fifty years ago that might influence wealth inequality?
Of course it was Nixon’s severing the final ties of the dollar to gold in 1971, which has enabled the Federal Reserve to create fiat money completely unchecked.
As demonstrated in multiple charts at the website WTFhappenedin1971, there is a clear divergence in incomes between high and low earners beginning sharply in 1971.
According to this 2018 Mises.org article, the base (M1) money supply ballooned by an incredible 17 times, with more than $3.2 trillion being created from 1971 to 2018. And it’s only getting worse, with another 33% increase in the first 7 months of 2020 alone.
Why does Fed money printing increase economic inequality?
In short, the rich receive a significant share of their income from investments, while the middle class primarily relies on their income from labor, and the poor a combination of labor income and government welfare payments.
When the Fed creates new fiat money out of thin air, it isn’t distributed evenly throughout the economy. Instead, it is inserted at specific points, typically via credit to business investors. As the Fed inflates a bubble, speculation with the new money also increases—which inflates the stock market, benefitting the investor class.
Meanwhile, the fiat money creation creates price inflation that permeates over time throughout the economy. Some of the more highly skilled in the middle class may receive salary increases to keep up with the inflation, while many of the lower-skilled middle class will struggle to keep up with rising prices.
Meanwhile, the poor, who lack the bargaining power to raise their wages to keep pace with inflation, and otherwise rely on relatively fixed incomes, fall further behind.
The failure of King to recognize the Fed’s major role in growing inequality undercuts any credibility his recommendations should be given.
Lastly is Economic Policy Institute research director Josh Bevins who incredibly calls for more money printing to help reduce economic inequality.
“Policymakers should re-target genuine full employment (the Fed is making good steps in this direction)” Bevins implores. How this supposed “expert” believes more asset bubble inflating money creation will reduce economic inequality goes without explanation.
Bevins further calls for a “substantially increased” federal minimum wage, without acknowledging that pricing low-skilled workers out of the workforce and eliminating their first rung on the career ladder will reduce the ability for low-income people to increase their earning power and narrow economic inequality.
More generous unemployment benefits is another of Bevins’ recommendations. But increasing the incentive to not work will result in more people, especially those already on the margins of employment, staying out of the workforce for longer periods of time—a great recipe to stymie the steady career track needed to climb out of low-income status.
How disappointing that a national publication like USA Today can do no better than “experts” who recommend government interventions that would end up increasing, rather than shrinking, economic inequality.
A recent meeting by a North Carolina state government task force underscored that the mission today of American police forces may well be less to “serve and protect” and more to “harass and extract.”
“Of North Carolina’s 1.9 million criminal charges, 1.6 million of those are misdemeanors,” reported the N.C Insider (subscription required). This statistic was revealed by Jessica Smith, a professor of public law and government at the UNC School of Government, to members of the N.C. Task Force on Racial Equity in an August 20 meeting.
Smith told the work group that only 6.7% of those misdemeanors were considered violent. “I would say that the justice system is largely a non-violent misdemeanor system,” Smith added.
According to the news account of the task force meeting, Smith said that “the majority of the nonviolent misdemeanor charges are traffic, including speeding, driving with a revoked license, expired registration or not having an operator’s license.” Moreover, the article continued, Smith noted that “outside traffic violations, the most charged misdemeanors are larceny, possession of drug paraphernalia, possessions of a half-ounce of marijuana and possession of marijuana paraphernalia.”
Clogging up the state’s court systems are cases of minor victimless offenses, according to Smith.
Smith pointed out some of the most absurd misdemeanors consuming the state court system’s time. These included “not having a city dog tag, leash law violations or having tinted windows,” according to the news report.
North Carolina’s trends mirror the national data.
In this 2019 Equal Justice Initiative article, former federal public defender and legal scholar Alexandra Natapoff “estimates that misdemeanors comprise approximately 80 percent of all arrests and 80 percent of state dockets, based on arrest data from the FBI and other statistical reports.”
Natapoff concludes from her research that, “Misdemeanors are moneymakers for local jurisdictions,” adding that “Because they fund courts, probation offices, public defender and prosecutor offices, and even the general budget in some jurisdictions…misdemeanors function as a regressive tax policy that shifts costs for basic services to the poorest citizens.”
Legislators create more and more violations, making it virtually impossible for the average citizen to make it through the day without violating one of them. This is on top of the laws, like drug possession, that prohibit “unapproved” behavior in which there is no actual victim. The criminal justice system has been turned into more of a cash cow extracting fines and penalties from peaceful citizens than an institution protecting its citizens from the aggression of others.
The report notes that “fewer than 5 percent” of the arrests are for serious violent crimes, and furthermore “the authors of the study suggested that arresting large numbers of people for minor offenses for nonviolent or comparatively minor offenses can effectively undermine the trust and legitimacy that effective law enforcement requires.”
Because of the rising trend of overcriminalization, Reason reported that “about 6.4 percent of Americans born before 1949 have been arrested, compared to about 23 percent of those born between 1979 and 1988.”
Unsurprisingly, Reason noted that “Drug arrests have grown increasingly common, now representing 9 percent of arrests for men and 8 percent for women,” and further that “11 percent of arrests of women and 16 percent of those of men are for underage drinking.”
Being arrested for even such petty, non-violent transgressions can cause long-lasting damage to the lives of those being charged. Stiff fines can put low-income people in to debt that takes years to climb out of, and adding a misdemeanor to one’s record can create significant barriers to employment.
And of course, having so many interactions between citizens and police increases the odds of more interactions turning violent or deadly.
We are taught in elementary school that our government exists to secure our rights to “life, liberty, and pursuit of happiness.” Police are to be deployed as a means to protect us from those that would violate such rights.
Sadly, we are way beyond that point. Legislators create countless laws to restrict or mandate behaviors having nothing to do with protecting our basic rights. Police are dispatched to enforce these rules, making criminals out of peaceful people who never aggressed against anyone.
The criminal justice system has turned into a money-making machine, punishing millions of victimless misdemeanors to collect fines to pay the people running and enforcing the system. Like everything else it touches, the state has turned the criminal justice system into a means to enrich itself at citizens’ expense.
Does a competitive, free market capitalist system drive down wages for the common man?
That’s the question I was confronted with in a recent exchange I had with a Marxist on Twitter.
My original post stated that “Free, competitive markets don’t drive down worker wages, as Marx argued.”
“Instead,” the post continued, “markets drive up wages because entrepreneurs must bid against one another to acquire and retain the workers they need.” This led me to my ultimate point that “government intervention that limits competition will repress wages.”
The take home point, of course, was to illustrate that when the state interferes with the market it harms the working class; in contrast to the excuses of statist interventionists who insist their interventions are designed to help the common man.
That conclusion was unacceptable for our friendly social media Marxist, however. He replied with the following comment:
How do markets drive up wages when there are more qualified people available than total jobs? Wouldn’t that drive down wages given someone who is starving without a job is always willing to work for a little less?
Skill is secondary to population size & total job availability…
This is a common objection raised by Marxists, and a pillar of Marx’s economic analysis. Marx claimed that competitive, capitalist market economies would drive down wages of workers for the reasons stated above. Namely, that the labor force outnumbers the amount of available jobs, putting workers at a grave disadvantage and forcing them to accept ever dwindling wages if they are to be hired. Employers have no reason to pay anything more than “starvation wages” because the supply of willing and desperate workers far outstrips the supply of jobs.
Employers can drop wages as far as they want and still find willing takers, according to the theory, because if one person refused to work for such little pay, there will be a significant pool of desperately unemployed people willing to accept the crumbs. This tendency for competitive capitalist markets to drive wages down to bare subsistence levels is often referred to as the “Iron Law of Wages.”
This is an argument still relevant to policy discussions today, so it’s important to address why this argument is wrong.
What Determines Wages?
For clarity, it is important to first gain an understanding of what determines wages. A highly useful insight can be gained from political scientist David Osterfeld’s essay in the 1993 book Requiem for Marx, edited by Yuri Maltsev:
Wage rates on the unhampered market do not depend on the individual worker’s ‘productivity’ but on the marginal productivity of labor. And the marginal productivity of labor is a product of savings, on the one hand, which creates additional capital and, on the other, entrepreneurial activity which directs this additional capital into the production of those goods and services most urgently desired by consumers.
The marginal productivity of labor, in short, is the value added to the production process of the next additional worker added to that process. And, as Osterfeld notes, the value added of that next worker will be determined largely by the amount and type of capital goods, i.e. machines, tools, technology, provided by the entrepreneur to aid the worker.
More specifically, wages will tend toward the present value of the marginal productivity of the worker. Say, for instance, an hour’s work adds $20 toward the value of a finished product that will likely be sold one year from now. That worker’s wages today will tend toward the estimated present value of $20 one year from now.
Importantly, the marginal productivity of labor in one line of industry heavily influences wage rates in other industries. In an unhampered, competitive market labor will flow to the highest wages made available for which they are qualified.
This means, as Ludwig von Mises pointed out in his 1956 book The Anti-Capitalist Mentality, that improvements in the marginal productivity of labor in some lines of industry that drive up wages will spur wage increases in seemingly unrelated industries.
Mises noted that there are many jobs in which the productivity of the worker has remained unchanged for centuries. For the barber, the butler, and basic agriculture work, for instance, worker output has remained roughly the same for generations, but wages have nevertheless risen.
Mises observed, “the wage rates earned by such workers are today much higher than they were in the past. They are higher because they are determined by the marginal productivity of labor. The employer of a butler withoholds this man from employment in a factory and must therefore pay the equivalent of the increase in output which the additional employment of one man in a factory would bring about.”
In short, because marginal productivity in other lines of work have increased and driven up those wages, employers must increase their pay in order to keep worker from seeking the alternative lines of work that pay more. As the opportunity costs to workers rise, i.e. the wages they are passing up to stay employed in their current job, so too will their actual wages.
As a result, the competitive market has a tendency toward driving up wages, even for lower-skilled sectors of the labor market.
Lump of Labor Fallacy
A fallacy many fall prey to when believing that the wages of the average worker will be driven down to subsistence levels is the “lump of labor fallacy.” This fallacy is based on the faulty premise that the number of jobs in the economy is fixed.
Indeed, viewing the labor market through the lens of supply and demand but limited by the lump of labor fallacy may lend credence to the “iron law of wages” theory on its surface. Outside of those with skills highly demanded by the marketplace, their argument goes, the majority of average Joes and Janes would be forced to accept low and dwindling wages because jobs are more scarce than workers.
Of course, in a competitive market entrepreneurs are constantly looking to either expand or start new ventures, creating new job opportunities. Employers must compete with each other for the needed labor for their endeavors.
As Osterfeld observed, “Wages rise because, in order to take advantage of new profit opportunities provided by additional capital, entrepreneurs must bid workers away from their current positions.”
What those limited by the lump of labor fallacy further overlook is that demand for labor is heightened not only by business expansion and new market entrants, but also by the threat of new entrants in the market who may come along and bid away workers.
Reality Shows That Wages Continue to Rise
It would of course be naïve to claim that employers increase wages out of the goodness of their hearts. As Mises observed in his book Human Action, “Each entrepreneur is eager to buy all the kinds of specific labor he needs for the realization of his plans at the cheapest price.”
These wages, however, “must be high enough to take the workers away from competing entrepreneurs,” he added. In other words, the competition of an unhampered market more than offsets the employers’ desires to drive wages lower.
As evidence, consider that even with an extremely hampered economy in the U.S., wages for the average worker have steadily risen.
According to this recent Bureau of Labor Statistics report, employer costs per hour (wages plus benefits) for average compensation for all private industry workers increased from 2004 to 2020, a time plagued with one of our nation’s harshest recession, from $23.29/hr to $35.34/hr (see pg. 191 of report, figures taken from March of each year). The rise marked an increase of 51.7%, well ahead of the inflation rate of 37.2% during that time.
Clearly, the ‘iron law of wages’ is being broken.
If my Marxist critic were correct, and the average worker has such little bargaining power, then wouldn’t a significant share of workers be working for the minimum wage?
As Marx wrote in the Communist Manifesto, “The average price of wage labor is the minimum wage, i.e. that quantum of means subsistence which is absolutely required to keep the laborer in bare existence as laborer.”
Today, instead of a measure of “subsistence” to which average wages would fall, there is a government-mandated legal minimum wage.
Aside from those with highly valued skills who will see their wages bid up, the majority of workers will have to compete for the remaining jobs. Thus, according the Marxian theory, there’d be no reason for employers to pay any more than the legally-mandated minimum for a vast number of jobs, because the number of those competing for such jobs would far outstrip the jobs available.
Of course, reality once again serves to dispel this faulty notion. This 2019 Bureau of Labor Statistics report shows that just 2.1 percent of hourly workers above age 16 earn “wages at or below the federal minimum.” Of those, 47 percent were ages 16 to 24. So indeed it’s only a very small fraction of workers compelled to work for the minimum wage, and of those nearly half are young people probably in their first job.
One of the key criticisms of free market capitalism is that workers have little to no bargaining power, because the supply of labor exceeds the demand. As such, employers can leverage this advantage to steadily grind wages down to a bare subsistence minimum.
This theory, however, suffers from some major shortcomings. First is the fact that workers have opportunity costs, and employers need to pay wages sufficient to keep them from seeking work in alternative fields. So the increase in marginal productivity even in only select industries can still provide overall upward pressure on wages.
Secondly, the argument suffers from the lump of labor fallacy, which falsely assumes the number of jobs in the economy is fixed. Expansion of current businesses and new business startups is a regular feature of a market economy, however, which grows the number of jobs available.
Contrary to Marx and modern-day Leftists, it is not competition of the market that drives down wages, but restrictions on competition. For instance, barriers to entry for new entrants and other market interference that protects incumbent firms from competition would make it easier for them to pay lower wages.
An unhampered, competitive market economy is the working man’s best friend; and government interference their enemy.
The article next itemized some obstacles to reforming some of society’s pressing problems. Police unions stand in the way of firing bad cops. Red tape gummed up the response to the spread of coronavirus.
Disappointingly, however, the article quickly squandered an opportunity to educate readers how a significant reduction in state power and influence would be the best recipe to heal much of society’s division. Instead, it hits readers with this line:
“Americans need to feel that government can make things better.”
This turn for the worse should have come as no surprise, given the author of the piece, Philip K. Howard, is the head of an organization called “Campaign for the Common Good.”
Any group or person claiming to be working toward the “common good” immediately should raise a red flag for libertarians. Of course, we know there is no such thing as the “common good,” but rather an extremely diverse set of individuals with varying wants and differing plans on how to achieve happiness.
So, how do we achieve this common good and overcome citizen’s sense of powerlessness, according to Mr. Howard?
“Let people take responsibility again. Give officials and citizens alike goals and guiding principles, and then let other people hold them accountable,” he recommends.
Who should “give” officials and citizens their goals and guiding principles goes unanswered.
Moreover, Howard states that overcoming powerlessness involves “letting” government officials do their job, including suggestions such as “Let local public health officials respond immediately to the pandemic,” “(L)et designated officials issue infrastructure permits after reasonable review,” and “(L)et teachers maintain order in the classroom.”
Such suggestions may be great for government officials, but doesn’t do much for citizens. Indeed, his suggestions further entrench the state as problem-solver for society, removing opportunities for free citizens to responsibly solve problems through voluntary cooperation.
To his credit, Howard criticizes the government’s overly-complex law books that allow for little discretion on the part of public officials or citizens, and calls for a process of simplifying and stripping them down.
He supports this notion, however, in part because it will “reactivate(s) our link to government.”
The last thing we need is a greater link to the oppressive and divisive leviathan government.
“Governing isn’t this hard,” Howard assures us. “America needs a new public operating system that re-empowers people with responsibility to deal sensibly with the situation before them.”
But a “new public operating system” will still carry with it the immoral baggage of the old one. It will be funded by taxes stolen from citizens. Its decrees will still be enforced by threats of force by an organization with a monopoly on violence.
Howard is focused largely on making government more efficient in carrying out its functions, and uninterested in limiting its size and scope. This won’t reduce the division that he expressed concern over. The state sows division because if forces some to fund others through welfare and wealth redistribution schemes, and it compels people with vastly different preferences to live under the same arbitrary rules having nothing to do with protecting people’s person and property.
Amazingly, Howard concludes with the statement, “The best cure for alienation is ownership.”
But that starts with self-ownership, not reducing red tape to allow government agents to more swiftly enforce their decrees or spend stolen taxpayer money.
Citizens feel powerless because the state is empowered to initiate force against them, with no repercussions. Powerlessness is not felt because government contractors are slowed from starting their tax-funded projects due to red tape.
Mr. Howard largely gets the diagnosis right. More people are getting frustrated with government and recognizing it as a source of division. Disappointingly, he gets the cure wrong.
Instead of a “reboot” of government, society needs a radical rollback of its power.
The federal government’s program of supplemental unemployment benefits of up to $600 per week, as provided for in the CARES Act, is set to expire at the end of July.
Whether or not to extend this program is setting up to become a contentious political battle mere months before this fall’s national election.
But what of the economic debate?
Keynesians like Paul Krugman who support the extension of the benefits focus on getting money in the hands of people most likely to spend it—boosting ‘aggregate demand.’
On Twitter, Krugman insisted the economic shutdown was “annoying but sustainable,” and added there are “no financial constraints” on government borrowing money to plug holes in the safety net, presumably including a continuation of the supplemental unemployment benefits.
To Krugman, a significant and extended period of diminished production (due to the shutdown) is sustainable via enhanced government benefits to maintain sufficient levels of consumer demand.
But as economist Per Bylund quickly noted, “You cannot eat money. And you cannot buy what isn’t being produced. Production precedes consumption.”
Indeed, the economic argument for the perceived benefits of extending supplemental unemployment assistance to stimulate aggregate demand stands on very shaky ground.
Even granting the assumption that the unemployed will spend all or most of the supplemental benefits on consumer goods, consumption unbacked by previous production merely represents capital consumption.
To illustrate, take the example of the food and agriculture industries. Let us assume that the unemployed spend their enhanced benefits on groceries. For further sake of simplicity, let’s assume all the groceries come from agriculture.
But where would the money come from that’s dispensed to the unemployed?
The financing of the enhanced unemployment benefits, as encouraged by Krugman, would come from funds borrowed by the government. The money lent to the government would necessarily come out of the economy’s pool of savings. The unemployment benefits, therefore, represent a shift in resources from savings to consumption.
In this case, this shift in wealth from savers to consumers means less saving available to finance farmers’ investment in capital equipment like tractors and irrigations systems. As productive capital goods wear out, capital consumption ensues. The farmers’ productive capacity is diminished. Now multiply this agriculture example across the entire economy.
Sustainable employment and economic growth relies on steady investment in capital goods. By directly financing consumer spending via borrowed funds, the government is financing the bidding away of scarce resources from the capital goods sector and in turn funding the consumption of capital.
As John Chamberlain, the late economic historian stated, “There is no political alchemy which can transmute diminished production into increased consumption.”
Without the productive capacity to meet increases in consumer demand, price inflation results as more consumer dollars are chasing an output of finished goods that can’t keep up. Rapidly rising prices in household staples, and a diminishing stock of capital goods slowing down output is not “sustainable,” contrary to what Krugman would like you to believe.
And what about when the timing is right to fully reopen the economy, end the supplemental unemployment benefits and try to get people back to work?
Unfortunately, because of the capital consumption encouraged by Krugman, recovery will be severely hampered and jobs hard to come by.
A diminished stock of worn out capital good is not the foundation upon which economic recovery is built. And the savings needed to replenish and expand the economy’s structure of production will have been diminished by the massive shift from savings to consumption by virtue of the government’s supplemental benefits.
One may support extending the supplemental unemployment benefits on the grounds of providing temporary aid to those impacted by the shutdown. But economic arguments presented by the likes of Krugman claiming a prolonged shutdown and indefinite extension of benefits are sustainable because there are “no financial constraints” on the government are pure nonsense.
Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics. Follow him on Twitter: @erasestate.
If the heads of the Federal Reserve are to be believed, Fed policies do not make wealth inequality worse.
When asked recently if the Fed’s policies widen inequality, San Francisco Federal Reserve President Mary Daly stated without reservation: “Not in my judgment.”
Previously, Fed Chairman Jay Powell at the end of May was less forceful in his response, but nevertheless danced around the question of Fed policy increasing inequality. “Everything we do is focused on creating an environment in which those people will have their best chance to keep their job or maybe get a new job,” was his response.
Of course, we know Powell and Daly are lying.
How the Fed Benefits the Investor Class
Austrian school investor Jesse Colombo writes at his site explainingcapitalism.org, “the Fed and the ‘paper’ dollar are the main reasons for America’s growing economic inequality.”
Why is this so?
“In simple terms,” Colombo explains, “inflation benefits the rich while hurting the middle class and poor due to the way each group’s finances are structured.”
In short, the rich receive a significant share of their income from investments, while the middle class primarily relies on their income from labor, and the poor a combination of labor income and government welfare payments.
When the Fed creates new fiat money out of thin air, it isn’t distributed evenly throughout the economy. Instead, it is inserted at specific points, typically via credit to business investors. As the Fed inflates a bubble, speculation with the new money also increases—which inflates the stock market and other major asset classes like housing, benefitting the investor class.
To see just how acute the rise in asset value for the investor class has been, massive fiat money printing has helped the S&P 500 balloon by more than 360% in the last 30 years, a nearly five-fold increase, and more than doubling in the last ten years alone.
Moreover, median home values have nearly tripled over the last 30 years, far surpassing the rate of inflation.
The overwhelming majority of these benefits accrue to a small group of investors.
This June 2 article on quartz.com reported that the “wealthiest 10% of U.S. households owned about 83%” of stock market wealth, according to a 2016 Federal Reserve Bank of St. Louis report.
“The richest one percent of Americans now account for more than half the value of equities owned by U.S. households, according to Goldman Sachs,” reported this February 2020 Financial Post article. Conversely, the bottom 90 percent of households owned just 12 percent of stock market wealth.
Additionally, rapidly rising home prices puts homeownership out of reach for more and more people. “Homeownership is increasingly out of reach for the typical American,” Redfin Chief Economist Daryl Fairweather said in this 2019 HousingWire.com article. “Over the last few years builders have focused on luxury homes, and there hasn’t been enough construction of affordable starter homes.”
After peaking in 2006 before the Great Recession, overall homeownership rates fell from a high of 69 percent to 63 percent in 2016. Ownership rates have been climbing again in recent years, but nevertheless the gains from housing value increases accrue not only to just those who can afford a home, but even more acutely to those in more expensive houses. Meanwhile, non-homeowners and those with lower-priced homes fall further behind.
Racial Wealth Gap
With a sharper and more critical eye being focused on racial issues—and the racial wealth gap in particular—due to recent events, the Fed is due its fair share of blame in this realm as well.
For starters, the benefits of rising home prices fueled by easy Fed money can only benefit actual homeowners. And, according to this February 2020 Urban Institute paper, “the gap between the black and white homeownership rates in the United States has increased to its highest level in 50 years” in 2017.
The white homeownership rate stood at 71.9 percent, compared to just 41.8 percent for blacks.
Furthermore, Federal Reserve data analyzed at capitalist.com shows that 61 percent of white households own publicly traded stock compared to just 31 percent of black households.
Even in middle and upper class households, the discrepancy persists. A March 2019 Investor’s Business Daily article reported that “A 2015 survey by Ariel asked Americans with household income of at least $50,000 whether they owned stocks or stock mutual funds. Eighty-six percent of whites said they did. For African-Americans, the number was 67%.”
In short, as Fed easy money policies benefit stockholders and homeowners, a disproportionate amount of those benefits are going to white households, further exacerbating the racial wealth gap.
There’s little doubt that the Federal Reserve increases wealth inequality overall, but deepens the racial wealth gap as well. The easy money policies of the last decade as the nation attempted to recover from the Great Recession provide a prime example.
As this 2019 MarketWatch.com article noted, “the Fed lowered interest rates, which had the knock-on effect of pushing easy money into the hands of the already-wealthy.”
As Deutsche Bank’s Securities’ chief economist Torsten Sløk said, “The response to the financial crisis was for the Fed to lower interest rates which in turn pushed home prices and stock prices steadily higher over the past decade.”
Like the old state lottery ads used to say “Lotto: You’ve got to be in it to win it.”
Similarly, to “win” benefits from Federal Reserve easy money policies, you’ve got to already be in the stock and homeownership game, i.e. the investor class.
It’s beyond disingenuous for the likes of Powell and Daly to claim the Federal Reserve doesn’t increase inequality. Any discussion of wealth inequality—be it overall or the racial wealth gap—is incomplete without a discussion of the Fed.
Bradley Thomas is creator of the website Erasethestate.com and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics. Follow him on Twitter: @erasestate.
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