What is the Inequality?

President Obama plans on focusing, “like a laser beam” I am sure, on the topic of income inequality in the upcoming State of the Union address next Tuesday 28 January.  This should come as a surprise to those of us paying attention because during the five years of Obama’s administration there has been the largest increase in the income disparity in quite a long time.  Paul Krugman likes to point out that wages in this country for the “working class” have not had a substantial increase since the late 60s.  The Left in general loves to make the case that the reason why capitalism is unfair is because it creates scenarios such as this that Obama will be discussing next Tuesday.  Well just how much is capitalism to blame for these wages?  And does wage stagnation mean that those who were in the lowest income brackets ten years ago still reside in that bracket today

Let’s just take a look at the first question.  What has caused wage stagnation?  The time period that the Left likes to point to that makes their point about wages is the period between the end of World War II and the late 60s when the stagnation began.  This was a period of large manufacturing output by the United States which meant that there was a large blue collar workforce.  I am sure that most of you have heard that in the late 50s and early 60s there were more millionaires in Detroit than there were in New York City.  Well what happened?

One of the things that happened was the ability to tap in to cheaper labor in outside countries because the rapid increase in shipping and transportation technology.  If the means of transporting cargo became more efficient, cost less than it did prior to World War II, and shipped much much more than ever before, then seeking foreign, cheaper labor in other countries made sense.  It helped bring many of the countries out of the depths of poverty.  But why seek the foreign labor to begin with?

While cargo transport technology and cheaper foreign labor markets came within reach of US manufacturers, the workforce in the United States became more expensive because much of it was unionized.  Unions artificially make the cost of labor more expensive because of wage agreements under the threat of strike and increased benefits beyond the affordability of the manufacturer.  I am sure that many of you have heard or read George Will comment on how much of the cost of a new GM car goes to paying for the benefits of its unionized labor.  But this is only part of the story.

While this unionized labor force was negotiating to price themselves out of work, they were sending their sons and daughters to college for the purpose of gaining a degree that would allow for them to work in white collar jobs.  So not only was the cost of the manufacturing labor force being artificially inflated, but the replacement labor force behind them was being trained for a service-centric, technologically advanced labor market.  The decrease in those willing to enter into the manufacturing workforce combined with the increased accessibility of foreign labor markets began to place nonunion white collar jobs in equilibrium with unionized blue collar jobs.  By the time Obama took the oath of office in 2008, the manufacturing labor force was below ten percent of the total labor force in the United States.

Coupled with this evolution in the labor force in the US was the ever increasing cost of living in the US.  During this same time line–late 60s to present–the cost of living increased at a greater rate than that of wages, particularly in manufacturing.  Professor Richard Wolff, make no mistake he is no friend to those of us on the Right, points out that this dichotomy between wages and cost of living forced Americans to mitigate the difference through excess credit usage.  However, there was another means available for bridging the gap between income and cost of living:  government assistance.  Through the use of tax credits, expanded government programs, and other government assistance the rising cost of living for the middle class was stemmed just for a short while.  The catch-22 of this approach was that with more and more government funding, either directly or indirectly, came new and higher forms of taxation causing the net take-home pay for Americans to become smaller still.  On some level, this also encouraged more and more Americans to simply not become part of the labor force and put an ever increasing burden on government budgets.

Today, the US has approximately 90 million people, for whatever reason, not in the labor force, not working.  Those who have remained in the workforce are not likely to see any true increase in their pay for the same work they were doing this time last year.  This phenomenon has been in place for quite some time, but does this mean that the number of people locked in to one income bracket remained constant over this same period of time?  Of course not.  The number of people who are making $100,000 a year today dwarfs the number of people who made it forty years ago.  The same rings true for $200K, $300K, and so on.  If the Left wants to make the case that a manufacturing job in 1967 has not offered a higher wage in relation to inflation or any other measurement, then let them.  But it certainly is not the case that a person making $20K a year in 1985 is still making $20K a year in 2014.  Most likely that person is in a higher income bracket.

Income inequality is just another canard, a charade, used by the Left to artificially control wages at the lower end of the income spectrum that will result in higher costs for those in the upper income spectrum, thereby, chipping away at the buying power of the higher income and the lower income earners.  Sure, the costs of an iPhone or an HDTV have decreased over the years, but have you checked out your grocery bill lately?  How about your electric bill?  The costs of the items that matter most to Americans–food, energy–have steadily increased putting a squeeze on the Middle Class.  These prices are the results of government interference in what was once a free market place.

The income of a person who works for a hedge firm or an investment bank has no baring on the wages you earn at your middle income white collar job, because the income for both positions is based on a worth assigned to them by the free-market.  It is the ever expanding presence of government in the free-market that skews how much the dollar is worth earned by both positions.  While the hedge firm guy makes $1 million a year, that million does not have the same purchasing power that it did forty years ago, or even 15 years ago, due to the inflated price of things in society.  If it is true of the million dollars, it is certainly true of the $100K.  The quickest means of increasing incomes would be to decrease the presence of government in society.  Decrease the transfer of dollars from producer to non-producers.  Decrease the subsidizing of non-profits that have become privately run arms of the government.  Decrease the tremendous public backing of public universities and force them to compete for the tuition dollars of students.  The less government involvement there is, the more take-home pay you will have.