|
Many Americans are unhappy about the
growing inequality in individual income and wealth. Corporate profits are
rising, executive salaries are soaring, but the wages of most workers are
barely moving. Even employees with technical skills are feeling squeezed
and college graduates are finding it difficult to make a fitting beginning.
It is not surprising that politicians, in search of a popular issue, are
adding their interpretations and recommendations. On the left, they are
criticizing corporations for unpatriotic behavior,
exporting American jobs in search for ever higher profits. On the right,
they are condemning corporations for hiring illegal aliens who come to the United States
and labor in the underground economy. Both sides
are waving the American flag and filling the air with political malice and
strife.
Men are made by nature unequal. Surely,
to assure social peace, all men must be equal before the law and have an
equal right to the protection of the law. But they do not have equal
ability and productivity and, therefore, do not have equal incomes. A
political order that endeavors to create economic
equality by force is unnatural; it is destined to self-destruct in
destitution, discord, and strife.
Individual incomes always depend on a
person's productivity in rendering services to others. Most individuals
merely earn compensation for services rendered, commonly called wages,
salaries, fees, or honoraria. Thrifty individuals may enjoy also interest
income on their savings. And enterprising individuals may even reap pure
profits which flow from correct anticipation of future needs and supplies,
future costs and prices, in short, future states of the market. In a
welfare state many people also enjoy transfer benefits forcibly taken from
taxpayers. More than fifty million Americans presently draw such payments
from their fellow countrymen.
In a free market economy individual
differences in income may be very visible although rather limited in
numbers. There are few corporate executives, artists, and authors with
million-dollar salaries and honoraria every year. There are not many
investors enjoying million-dollar interest payments on their holdings. But
there always are some young entrepreneurs who manage to foresee important
market changes and therefore reap million-dollar profits. But all such
differences pale in significance when compared with those caused by man's
choice of social and economic organization. Depending on his perception of
the nature of man and on his understanding of social and economic
cooperation, he may choose to live in a great variety of economic orders. Some
are highly productive yielding high standards of living for all; others are
barren and poor condemning members to short and wretched lives. According
to The Economist's World in Figures, 2006 edition, the people in
Luxembourg, for instance, are enjoying an annual gross domestic product
(GDP) of $55,500 per year, in Norway they are producing $37,910, and in the
United States $37,750. In contrast, the people of Somalia subsist on $440 a year, in Sierra Leone on $530, and in Malawi on
$590. The life expectance in the latter is about one-half of that in the
former.
Such country differences began to
develop some 300 years ago when in Western Europe
a new social and economic philosophy began to remove institutional barriers
to economic development. The laissez-faire philosophy of Adam Smith, David
Ricardo, and many other authors in England,
France, Germany, and the United States replaced old
doctrines that branded economic freedom and acquisitiveness as immoral and
advocated legal barriers to economic inequality. The new philosophy set the
people free to remove these barriers and pursue their economic interests. Economic
production immediately accelerated and standards of living increased
visibly. Unfortunately, occasional relapses to old thoughts and policies
interrupted the economic progress, and many countries that have never been
exposed to the light of economic freedom continue to linger in dismal
poverty.
At the present, the light is spreading
slowly throughout many parts of the world, even where the political
structures continue to be authoritarian. China,
Vietnam, and India seem
to be leading the way. But economic stagnation is holding many other
countries in its grip as new production barriers are being erected to
reinforce the old. Business taxes may be raised and business capital may be
consumed not only by the poor and needy but also an ever-hungry
bureaucracy. There is economic stagnation in France,
Germany, Italy, Japan,
and Switzerland.
In many countries some economic pursuits do prosper while others stagnate
or even decline.
Economic progress builds on the
formation and investment of business capital which raises output and
income. It may do so with new methods of production and new inventions or
without altering the mode of production. Market pressures then divide the
new income between the entrepreneurs who lead the way and the suppliers of
the factors of production. In the short run, the entrepreneurs may be the
beneficiaries but, in the long run, production adjustments always eliminate
the entrepreneurial profits and make workers the primary recipients. In the
United States
and all other capitalistic countries they have been the main beneficiaries
ever since obstacles were first removed and new investments were made.
Short-run syndromes of change now are
permeating the American economy. Some executive incomes are counted in the
millions of dollars, but the wages of many workers are barely keeping up
with the rate of inflation. And once again, old explanations are making
their appearance, finding grievous fault with such profits and the profit
motive. These critics favor a more progressive
tax system that would reduce the gap between the rich and the poor. They
would reform and expand social welfare, in particular the health care
system and the public pension system. And above all, they would restructure
the education system in which only three percent of students at top colleges
come from the poorest quarter of the population. Unfortunately, such
reforms not only would boost the powers of the political reformers but also
raise the costs of labor and weaken the labor market. They may even increase the rate of
unemployment, especially of unskilled workers. There would be more
beneficiaries of Social Security, Medicare, Medicaid, and generous
scholarships, but social mobility would suffer another blow. In a heavily
taxed and regulated economy it is much more difficult for a poor worker to
advance in income, wealth, and position than for a wealthy person to remain
wealthy.
Globalization is outsourcing some
white-collar jobs, which is more grist for the mill of the reformers. Their
eyes are glued on executive incomes; they are blind to policies that have
undesirable consequences, policies that may even give rise to the very
effects which they deplore. There cannot be any doubt that the monetary
policies of the Federal Reserve System greatly affect not only the
purchasing power of the U.S. dollar but also individual income and wealth. When
economic activity slowed down in 2002 the Fed immediately slashed its
discount rate to 1¼% and then 1%, the lowest in 45 years. Resting on
the Fed rate, all other interest rates promptly plummeted to levels far
below true market rates, which induced some investors to search for higher
rates and higher incomes abroad. With the discount rate at 1% and all other
rates not much higher, and with foreign rates at double and triple levels,
it is only natural that many investors seek higher returns abroad. They may
even have to leave the country in order to meet the competition that is now
abroad. Surely, the driving force is the investor's profit motive, but it
is the Federal Reserve policy that creates the foreign opportunities.
In a free and unhampered economy the
short run is a period of readjustment to a changing market condition. Entrepreneurs
and investors react quickly in order to maximize their profits. When
legislators and regulators, for any reason, erect their barriers, they
obviously delay the readjustment; labor
productivity and wage rates may stagnate or even decline. Legislation and
regulation may turn a free market economy into a command economy with rigid
income and class structures. Massive deficit spending may pave the way. At
the present, the federal government is suffering budget deficits amounting
to hundreds of billions of dollars, which are readily financed by the
Federal Reserve System. Surely, the Fed does not directly purchase new Treasury
I.O.U.s; it merely enables American and foreign
financial institutions to buy them.
Extraordinary expansion of money and
credit gave rise to phenomenal trade deficits, $618 billion in 2004, some
$700 billion in 2005, and probably higher yet in
2006. Suffered by any other country, such deficits would soon cause the
national currency to flounder and thus call an early halt to the deficits. But
the U.S. dollar is the primary reserve currency of the world, which
persuades many foreign creditors to cling to their dollars or invest them
in dollar claims. According to some estimates, foreign banks and investors
are holding some $9 trillion of U.S. paper assets. They are owning some 43% of U.S. Treasuries, 25% of U.S. corporate bonds, and 12 % of U.S.
corporate equities. Dollar cash holdings as well as U.S. Treasury
obligations obviously are no investments in business facilities, such as
corporate stocks, bills, notes, or bonds, which would raise labor productivity and wage rates.
Many Americans undoubtedly are unhappy
about the growing inequality in individual income and wealth. They are
guided by simple motives and beliefs in the equality of man, which
theologians, philosophers, and statesmen have featured since the beginning
of time. Thomas Jefferson affirmed it in the Declaration of Independence:
"We hold these truths to be self-evident, that all men are created
equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of
happiness." No matter how we may read this declaration, it does not
dwell on any equality of income and wealth. On the contrary, it speaks of
"unalienable rights" in "the pursuit of happiness,"
which undoubtedly comprises also the right to pursue income and wealth.
When Thomas Jefferson wrote the
Declaration Continental Congress had little money and poor means of
obtaining more. The financial situation was rather precarious. Congress
then authorized many issues of paper dollars and the states followed suit,
issuing their own. By the end of the war, they were "not worth a
Continental." Surely, the current situation differs significantly from
that of the American Revolution, but it also resembles it in several
important aspects. Then and now the political authorities eagerly issued
paper dollars that lost some of their value every day. The economic
maladjustments which the issues brought about created countless
opportunities for knowledgeable entrepreneurs to make the needed
readjustments. While labor productivity and
income stagnated or even declined, business opportunities and profits
actually soared.
The old order always changes, yielding
to the new; but many economic changes merely reflect variations in monetary
policy and their inescapable consequences.
|
