Trevor Dobbs, Staff Writer
America has an income inequality problem, and not because of the reasons you have always heard of. While some do not think this is a problem at all, others think that it is the biggest problem of our times. “The top 1% owns as much wealth as the bottom 90%,” is frequently what you hear from the likes of former Secretary of Labor Robert Reich, Senator Bernie Sanders, Senator Elizabeth Warren and other major figures from the progressive left. The truth is, they are absolutely correct. Most of America’s wealth is absolutely going to the very top margin of wealth earners. The questions are: is this a problem, why is this happening, and how do we fix it?
Is wealth inequality an issue that Americans should concern themselves with or is this just merely an abstract concept that people like to talk about? The question is never cut and dry; any honest discussion about this topic is going to require context. If by “income inequality” one means the fact that a doctor, lawyer, business manager, or other professional makes more money than their lowest paid employee, then income inequality is not an issue; if a person chooses to spend longer in school, work harder and produce more effort that person is going to rightfully be rewarded with a proportional amount of wealth. I don’t even find it particularly problematic that CEO’s or celebrities make a significant amount of money, as they produce something for a price that people willfully pay. However, what if by chance, income inequality isn’t as a result of effort, but rather, what if this income inequality is as a result of “gaming the system” via asset manipulation through equity and derivative markets, thus creating massive wealth distribution from the bottom to the top? Then income inequality becomes very, very bad.
The problem arises from the way that our system is set up. That is, we have a system where equity markets, derivatives, securities, etc. can all be manipulated in value through open market operations as well as through state fiscal policy. In other words, what Bernie Sanders completely does not get is that the wealth he refers to in his “top one percent” reference is not in the form of individuals in wealthier tax brackets taking home higher pay cheques, rather these people make their money by manipulating asset prices and “betting on black” to earn against those who lost out. What distinguishes these individuals from you or I has nothing to do with morality, as these individuals are simply smart enough to know how to make money, rather what makes them different is that rather than sell their labor, they make their money by inflating the aforementioned assets: increasing real estate asset price, increasing stock value, etc.
If you have real estate, and that real estate value jumps from $100,000 to $200,000, you have created $100,000 in wealth without earning traditional “income.” Warren Buffet is one of the richest men alive, yet he only makes an “income” in the hundreds of thousands of dollars per year. Who pays for this increase and where does this wealth come from? It comes from the next person to purchase the home, someone whom must pay more for the same product than the original purchaser of the asset; this works the same way in every aspect of the economy. Without having to lift a finger, an asset owner has increased their profit by charging the next person more.
While this is an incredibly simplified version, this is basically how most income inequality is created. Either asset manipulation is inflation or causes inflation, and the poor must pick up the tab by working more to purchase the same product or service. Meanwhile people who get wealthy through this system have not had to put in any effort at all to create this wealth, they simply had to own whatever it is that the consumer wants and to charge more certificates of labor, money, for them to obtain it. Long story short, income inequality is caused by inflation that far outpaces wages; this inflation is too great for any realistic prospect of wage growth to keep up with. The fact that this inflationary growth is so high means that any kind of wage increases we try and push for as well as any increases in the income tax rate ultimately will not do much good.
The best way to combat and to fix this system is to fix it at its root. To fix this issue at the root, the only way to do this is to create a system of sound money. By sound money, I mean a system that doesn’t regularly increase the money supply through the banking/central banking system. When prices rise by 10 percent each year, that is effectively a 10 percent reduction in your purchasing power as a consumer; unless you obtain a raise that is equal to or greater than the Consumer Price Index percentage raised each year, then you have effectively gotten a pay decrease from your employer. This can easily be taken away by ushering in a system of 100 percent reserve banking, backed by perhaps a gold and/or silver standard.
By having a system that constrains the rate of expansion of the money supply to the amount of new gold that is mined per year, we effectively can increase the money supply just enough to avoid economic deflation as well as completely avoid inflation. This, in short, will ensure that the income inequality is stopped at the source. Housing prices will be within the range of purchasing out of pocket, stocks will be much cheaper to buy into, and prices will stabilize across the board.