In any profession, prescription without diagnosis is malpractice and that includes the profession of Economics. Just as there is no need to cure people who have red hair, income inequality isn’t an ailment; it is a sign that free markets are properly assessing the value that results from the labor of people in different professions. Aside from the fact that equal incomes for the performance of dissimilar work resulting in wildly disparate measures of value is a ludicrous idea in and of itself, there are two additional fatal flaws in Thomas Picketty’s theory that governments can fix “Income Inequality” by redistributing capital. The first flaw is that economics never play a role in the political decision making process. By definition, governments which are composed of Politicians make political decisions. The second flaw of Picketty’s theory is that the government’s confiscation of additional capital through higher tax rates increases the cost of capital and diminishes its availability to fuel economic growth. Just as it is impossible to feed a greater number of people by cutting smaller and smaller pieces from the same size pie, income can’t grow in an economy that doesn’t itself grow. You need a bigger economic pie. Jack Kemp’s famous line “You cant have capitalism without capital,” still applies! Greater economic growth, provided by more productive labor, fueled by additional capital investment is the key to increasing wages.
If it were true that government was superior to the private sector in its ability to allocate capital, the countries whose government is dominant in directing the activities of the marketplace would provide high wages for everyone. Newspapers would be filled with stories espousing the wonders of these modern day Utopias and the clever elites that run them. Instead, their pages chronicle the hardships faced by the citizens whose government has chosen centrally planned economies and the high rates of taxation needed to fund them, rather than free markets and low tax rates. All one need do is look. The rationing of basic necessities in an oil-rich Venezuela is real world proof of the inferior ability of government to allocate economic resources. What little prosperity can be found in Cuba is directly tied to the government’s meager efforts to provide the slightest bit of freedom in very limited sectors of the economy. The North Korean’s ability to detonate a nuclear bomb does nothing to help raise that country’s poor out of darkness imposed by the lack of electric-generating capacity. Not even the smartest government can allocate capital better than the free market.
Our current economic malaise is not a new phenomenon; we’ve been here before. The prosperity created by the booming economy of the 1960’s, built on a solid foundation of sound money and lower tax rates, was completely undone by the monetary blunders and the increased taxes on income and capital at the end of that decade. This illustrated perfectly what happens when the government forces entrepreneurs to the sideline by raising taxes and corrupting the currency to the point where returns on investment are no longer adequate to entice investors to supply additional capital. An era of stagflation ensued that went unchecked for nearly a decade until a “strong dollar “ Fed policy and lower tax rates championed by Jack Kemp were implemented by the Reagan Administration. The 1980’s were a decade of significant economic growth, which saw GDP almost double during Reagan’s two terms in office.
We have once again come full circle. Personal and Corporate income tax rates have been pushed back to the point where they are now among the highest in the world. The combined employee/employer Social Security and Medicare tax rate, a direct tax on labor, can now reach as high as 16.2%. The tax on capital gains, which is a tax on successful risk taking, has been increased by over 60%. This is the largest increase in the capital gains tax in US history. With tax rates climbing nearer and nearer to Piketty’s ideal, shouldn’t we be seeing the fruits of high taxes and increased regulation he predicts? Unless, as I suspect, Piketty’s perceived cure for the illness is actually the cause, and bigger doses of his cure-all elixir simply sicken the patient further.
The real cure for the economy is economic Growth! The road back to economic growth, and the lower unemployment and higher wages that come with it, starts with a proper diagnosis. Taxes are too high, regulations are too many, and our currency is too weak. Fix these problems and the patient will quickly return to health!