#73 Income Inequality and Inflation

It can be confusing to some, to understand the interactions between income and the soundness of money. Of course, the politically popular answer to income inequality under expansionary monetary policy is destructive minimum wage regulation. However, if you’re a long time reader, you know why this type of policy is ultimately nothing more than a disruptive band-aid on the underlying hemorrhage.

Income inequality is an often misrepresented talking point. As Thomas Sowell explains in his book “Discrimination and Disparities”, factually accurate data in and of itself does necessarily accurately depict reality, dependent upon how it is presented. For example, in his book Sowell mentions how income inequality is commonly used to demonstrate an oppression bias against a certain race or against a certain class of earners. Further, he goes on to explain that the mainstream assumption here is that the bottom 90% of earners and likewise the top 10% of earners is an entrenched class system. Where each individual existing is the system is relegated to exist forever in their particular income bracket due to discrimination or disposition.

Rather, Sowell explains, the individuals in the category of top earners is in constant flux, and income disparities are often accounted for, not by wages, but by significant capital gains in which an individual may have realized a large equity or personal property position, jumped up to the top of the income bracket for a particular year, and then settled back down into the lower brackets in later time.

I propose taking Sowell’s analysis here a bit further as this concept can be used to explain the shrinking share of total wealth earned by the bottom 90% and its flow to the top 1% as shown in the chart above. As our readers well know by now, expansionary monetary policy artificially drives down the replacement cost of capital and drives up the replacement cost of assets. Thus a disproportionate share of aggregate income makes its way to those with either enough pre-existing capital to afford a large distribution of inflation prone assets or those with special access to near zero cost capital who buy up assets below their replacement value.

Not only does this distortion of economic calculation disproportionately aid those with the higher relative ownership of assets, it is also disproportionately punishes wage earners who do not possess capital gain income or have access to cheap capital. Even though, on a year by year basis, the nominal value of their wages might increase, the real value of their purchasing power (across the entire spectrum of a market economy) is eroded at the same rate at which the monetary base expands.

You should be able to reason why this particular truth is not politically useful to the state, as expansionary monetary policy affords revolving door politicians the opportunities to deficit spend. Hence why you end up with an intelligentsia which promotes band-aid fixes like a minimum wage hike as a solution to systemic imbalances created by a bureaucratic redistribution of wealth which favors the most wealthy.

Ultimately, this is why Universal Basic Income is a faulty solution. In order to afford such measures, massive monetary expansion would be required, and the lowest earners suffer the most from such a policy. Expansion of the monetary base then drives up the marginal cost of necessities and the relative ability of the lower wage earners to afford inflation prone store of value assets like equity, real estate, or commodities is still effectively zero.


Book of the Month:

The Road to Serfdom by F A Hayek

-“The state should confine itself to establishing rules applying to general types of situations and should allow the individuals freedom in everything which depends on the circumstances of time and place, because only the individuals concerned in each instance can fully know these circumstances and adapt their actions to them. If the individuals are able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect these plans. But if the actions of the state are to be predictable, they must be determined by rules fixed independently of the concrete circumstances which can be neither foreseen nor taken into account beforehand; and the particular effects of such actions will be unpredictable. If, on the other hand, the state were to direct the individual’s actions so as the achieve particular ends, its actions would have to be decided on the basis of the full circumstances of the moment and would therefore be unpredictable. Hence the familiar fact that the more the state “plans”, the more difficult planning becomes for the individual.”

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