Income Inequality: The Austrian Perspective

Roger Koppl at the Thinkmarkets blog explains the controversial issue of income inequality from the Austrian school perspective;

This indifference to income distribution is all the more mysterious because pro-market thinkers generally support a theory of politics that tells us to watch out for ways the state can be used to create unjust privileges for some at the expense of others. We should expect the distribution of income to be skewed toward the politically powerful and away from the poor and politically weak. In a representative democracy “special interests” engage in “rent seeking” to get special favors. Those special favors enrich some at the expense of others. That’s what they are meant to do!

Liberal political theory tells us to expect that sort of thing as a sort of disease to which the body politic is subject under representative democracy. Our presumption, then, should be that much of the inequality of any epoch is produced by tariffs, licensing restrictions, bailouts, and other specific acts of governments. Most of the time the game is rigged more or less. (The trick of constitutional design is to minimize this evil bathwater without tossing out freedom or democracy.) The more a society’s income distribution is determined by politics and not markets, the more it will be skewed away from whatever pattern would emerge in a less fettered market economy. And in general, that skew will be toward greater inequality. As the political component grows, we can expect power to be concentrated in fewer and fewer hands and income distribution be more and more unequal. If political power is growing, we should strongly suspect that some of the rich are using the state to squeeze money from most of the poor.

Mr. Koppl identifies four ways governments create such inequality: Privatizing profits and socializing losses, Regulation, Collapse of the rule of law and Public Schools

Pls read the rest here

Quote of the Day: The Bottom One Percent

We hear a lot about the top 1%. We don't hear a lot about the bottom 1%. There are about 313 million people in America today. 1% of 313 million is 3,130,000. In our prisons today are 2,200,000 people. So the people in prison are 2/3 of one percent. And their wages are typically about 23 cents an hour. They are, essentially, the bottom 1%.

Many of them are there for violent crimes, theft, fraud, and other such things. But hundreds of thousands of them are there for buying, selling, or producing illegal drugs. The drug war has put them there. And we taxpayers are paying $30,000 a year and more to keep them there.

So let me get this straight: high-income people are paying lots of taxes so that the government can put poor people in prison and keep them poor or put non-poor people in prison and make them poor.

We hear the occupy people advocate taxing the top 1% more. I've got a better idea: let's tax the top 1% less--they're already paying a disproportionately high share of taxes--and let a few hundred thousand of the bottom one percent out of prison and out of their grinding poverty in prison.

That’s from Professor David Henderson.

War on Naked Shorts: EU Bans Short Selling

Politicization of the marketplace has been broadening. Trading curbs are not only applied to commodities but to short-selling as well.

From Bloomberg,

The European Union reached a deal as part of a short-selling law that will pave the way for an optional ban on naked credit-default swaps on sovereign debt.

Poland, which holds the rotating presidency of the EU, and lawmakers from the European Parliament reached the accord at a meeting in Brussels yesterday.

Under the deal, traders may be prevented from buying CDS on government bonds unless they either own the sovereign debt or other assets whose price moves in tandem with it. Nations will have the right to opt out of the measure if they detect signs that it may affect their borrowing costs.

“These balanced measures will ensure that sovereign CDS are used for the purpose for which they were designed, hedging against the risk of sovereign default, without putting at risk the proper functioning of sovereign-debt markets,” EU Financial Services Commissioner Michel Barnier said in a statement.

German Finance Minister Wolfgang Schaeuble and lawmakers in the European Parliament have called for a ban on naked CDS trades on government debt over concerns the practice fueled the euro zone’s debt crisis. Germany already has restrictions on using swaps to bet on sovereign defaults.

Some European governments have also criticized the use of short selling to bet against bank stocks, arguing that the practice has roiled markets. Volatility that sent European bank stocks to two-year lows led France, Spain, Belgium and Italy in August to impose temporary bans on short selling that remain in force.

Opt-Out Clause

Under yesterday’s deal, national regulators will be able to suspend the CDS ban in their territory at the first signs that it may harm their sovereign debt market.

The opt out-clause won over some critics of possible bans.

“I never signed up to the belief that a ban on uncovered sovereign CDS would have any positive impact,” Syed Kamall, who represents London in the EU Parliament, said in an e-mailed statement. “However, I’m reassured that member states will have the ability to opt out of the ban, if they see signals that sovereign debt markets are distressed.”

The European Securities and Markets Authority will give a non-binding opinion on whether a national regulators’ decision to drop the ban makes sense. ESMA coordinates the work of national markets regulators in the 27-nation EU.

Renew Indefinitely

While the suspensions will in theory be temporary, regulators will be able to renew them indefinitely. Under the terms of the agreement, existing CDS positions will be grandfathered until they expire.

CDS are instruments that act as insurance for the buyer against losses on bonds. The practice becomes naked when someone buys swaps on debt that they do not actually own.

The measure forms part of a broader agreement on an EU law that will also curb naked short selling of stocks and government bonds.

All these curbs seem like a 'comprehensive strategy' to preserve the status quo

Global governments want to see LOWER commodity prices because this allows them some space to apply more inflationism to uphold political goals when deemed as expedient by the incumbent authorities. Also this allows them to declare victory against ‘inflation’ or to swagger about the success of their policies.

Governments do not want see the public go SHORT on sovereign debt because the welfare state based governments badly desire to maintain their spendthrift -borrow and spend-ways, whose benefits accrue to the political class, their voting constituent groups and their cronies.

Instead governments want HIGHER stock markets, particularly the banking and financial sectors as these institutions hold much of sovereign debt in their balance sheets as Basel mandated ‘risk free’ assets. Remember, banks serve as the PRINCIPAL conduits in the financing of the welfare state.

That’s why a ban on naked shorts, a form of price control, has been designed NOT only to preserve the access to funding by the welfare state, they are meant to keep banking and financial stocks AFLOAT.

Besides for central bankers higher stock markets PROMOTE aggregate demand via more spending (regardless of what kind of spending).

Yet these policies are directed to benefit holders financial assets at the expense of the productive sectors of the economy. Wealth/Income inequality and political inequality anyone?

To add it up: The overall direction of global market interventions has been to promote Bernanke’s doctrine of the wealth effect worldwide and to preserve the welfare state.

The caveat is that all these cumulative actions presumes that market interventions will effectively skew the law of demand supply in their favor—a utopian scenario.

Occupy Wall Street guys, have you been listening?

Video On US Income Inequality: What Statistics Don’t Say

In this video, Professor Steve Horwitz explains the myth behind mainstream’s presentation of “income inequality”. (hat tip: Professor Art Carden)

Markets and Inequality: What Goes Up Must Come Down?

In our October’s Spreading the Wealth? Market IS Doing It! we averred that falling markets have been reducing the net worth of the richest. This has possibly been closing much of the controversial “inequality” gap.

We’ve got some interesting charts from the Economist….

Fabulous "inflationary" driven booms almost equal horrendous "deflationary" bust.

According to the Economist, ``INVESTORS are told that the value of their shares may go down as well as up. Rarely, however, do they plummet as far as they did in 2008. The total return of the S&P 500 index fell by nearly 40% last year, the second-worst performance by America's stockmarket since 1825, according to calculations by Value Square, a Belgian asset-management firm. Comparisons to the Depression are clear: only in 1931 and 1937 were there similarly abysmal losses. The firm looked at various predecessors of the S&P 500 from 1923 onwards, and for earlier years took data from a working paper by Yale Management School on the returns of companies listed on the New York Stock Exchange. Since 1825, 129 years saw rising returns, whereas 55 suffered falls—four of them in this century.”

And since stock market exposure is highest with those from the upper income strata….

Courtesy of Investment Company Institute

Apparently falling markets hurt them more, where according to the Economist,

``Over a third of American millionaire households said they lost at least 30% of their net worth since September, according to a new report by Spectrem Group, a financial consultancy. Property, mutual funds, shares and annuities took the biggest knocks. Unsurprisingly, financial advisors are under more scrutiny, with satisfaction levels falling from 60% earlier in the year to 40%. A majority of the wealthy say they may not be able to support their lifestyles and nearly 20% will delay retirement.”

Liberals must be enjoying these…

Spreading the Wealth? Market IS Doing It!

At almost every election period candidates almost always raise the issue of income inequality as one of their top drawing crowd agenda. And almost always the seeming all popular solution has been to find ways to redistribute wealth.

It is like donating part of what you earn (although through legal coercion) to the underprivileged person on the street hoping that he/she uses this to improve on his/her life or at least to his/her family and much more importantly contribute to the wellbeing of society. Noble intentions indeed.

But here is the problem, what if the person turns up to be a dreg who takes your donation only to buy a bottle of gin? What if most of what we redistribute ends up producing a culture of dependency or to the pockets of the so-called wealth distributors? What if societies’ most productive resources are mainly channeled to non productive activities?

The end result is likely a lowered standard of living for the said society.

Nevertheless, who has the widest income equality or tendency to “spread the wealth” among the rich nations?

The answer is the US, that’s according to the Economist, `` And there is a lot of spreading potential: income distribution in America is the widest of the 30 countries of the OECD. The top 10% (or decile) of earners have an average $87,257 of disposable income, while those in the bottom decile have $5,819, among the very lowest of any country. Britain, Canada and Luxembourg also see big differences between the richest and poorest.”

Courtesy of the Economist

So it wouldn’t take so much for US Presidential candidates, during this election season, and liberal media to raise what development author Robert Ringer call as GAVEC ("guiltism", "angerism", "villainism", "envyism", "covetism") to ride along the advocacy to snag political power by promulgating policies of “spreading the wealth”.

But it doesn’t really require politicians to do it.

The way financial markets have been behaving today seems like more than sufficient force for wealth equalization.

For this year an estimated $30 trillion have been wiped off from global equity markets, notwithstanding losses written off by banks (estimated $680 billion) and global real estate markets.

Courtesy of Wall Street Journal

And which social group have been taking THE beating? You guessed... it the wealthiest!

This from Robert Frank in Wall Street Journal,

``The share of income held by the richest 1% of Americans has declined during each of the past three downturns. Between 2000 and 2002, their share fell to 16.9% from 21.5%, according to Internal Revenue Service income data compiled by economists Emmanuel Saez and Thomas Piketty.

``Their share also fell during the 1990 recession, hitting 13.4% in 1992 compared with 15.5% in 1988. The steepest decline was during the Great Depression, when the richest 1% saw their share of income plunge to 15.5% in 1931 from 23.9% in 1928.

"The Depression may be the best analogy for today when it comes to what will happen with income shares," said Mr. Saez, an economics professor at the University of California, Berkeley. He predicts that the share of income held by the top 1% will probably fall to 18% or 19% in the next year or two -- down from an estimated 23% or 24% in 2007.

``During the Depression, the assets of the wealthy declined along with their incomes. In 1928 the richest 1% held 36.5% of the nation's wealth; by 1932 it shrank to 28%. Studies by other economists and researchers show similar declines.

``The main reason for the declines: falling stock values. The wealthiest Americans have a greater share of their wealth concentrated in stocks and financial assets. When stocks plunge, as they have lately, the rich are hit disproportionately.

``The wealthiest 1% of Americans held more than half the nation's direct holdings of publicly traded stocks in 2004, according to the Federal Reserve. Stocks accounted for 11% of their wealth, compared with less than 3% for Americans in the 50th to 90th percentiles. The rich also earn more of their incomes from stock options.

``Of course, the rest of America also is losing wealth and income -- from falling home prices, rising unemployment and declining 401(k) accounts. But rising inequality has largely been fueled by surges at the top, and without capital gains or soaring business profits, those gains will reverse.”

So liberals should now pop the champagne bottles to celebrate the narrowing wealth inequality even without policy actions!

At the end of the day we get ourselves to be reminded of George Orwell's cynical Animalism laws in his satirical novel the Animal Farm ``All animals are equal, but some animals are more equal than others."