Excerpts from the article by James E. Miller at the the Ludwig Von Mises Institute of Canada.
(Note: I’ve made this case here at ARL numerous times…this lays it out pretty well. – HT)
But what of the inequality in income that exists in today’s state-corporatist economy? Did the 1% acquire its wealth solely through hard work? The answer is hardly in many cases….
Krugman and Stiglitz rightfully point out that the greatest periods of income inequality in the United States were the late 1920s and the period since the mid-1990s. What they fail to mention is that both these periods were not defined by capitalism run amok but by massive credit expansion. (emphasis here and below mine – HT) This expansion in credit, aided and abetted by the Federal Reserve’s loose money policy, is the real culprit behind vast income inequality.
Economist George Reisman explains:
the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.
Since it’s so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices.
Money acts as a medium of exchange but is not neutral in its effects on receivership. Those first receivers are able to bid up the price of goods before any other market participants. As the newly created money flows into the economy, the general price level rises to reflect the new volume of currency. In practice, credit expansion which brings about a reduction in interest rates also increases the amount of time businesses can go without making deductions for depreciation on their balance sheets as they purchase capital goods.
Because investment tends to go toward durable goods during periods of credit expansion, there is less funds left over to devote to labor. Profits end up being recorded while wages sag behind. Since credit expansion and inflationary policy go hand in hand in distorting relative prices and must eventually come to an end, the bust that occurs reveals wasteful investment. Recession sets in shortly thereafter.
Printed money is not the same as accumulated savings which would otherwise fund sustainable lines of investment. And it is only through adding to the economy’s pool of real savings that productive capacity is able to increase in the long term. The wealthy have a higher propensity to save precisely because they have a higher income. It is through their savings that new business ventures are funded and the economy is able to grow without the faux profits from government-enabled credit expansion. This is why raising taxes on the rich is a backwards solution to income inequality. Taxation only funnels money out of the productive, private sector and into the public sector which focuses on spending to meet political ends rather than consumer satisfaction. All government spending boils down to wasted capital. The truth is that capital is always scarce; there is never enough of it.
Check out the rest of the article for more clear thinking on this subject. My prescription, as noted in the past, is to restore sound money and, thus, stable pricing and allow the market to establish appropriate interest rates. Money will naturally flow towards “real” returns, including those productive activities that require appropriately compensated labor inputs. – HT