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Deist: So Joe, I notice that recently this topic of
income inequality seems to be all over the news. President's been talking about it
as a sort of a touchstone in his second term.
The new, very left-wing mayor of New York City
has called it a priority. Even the pope has been out there
speaking publicly about income inequality. So, I'd like to just
ask you, sort of generally, what would be an Austrian perspective on this? How should
we think about
the topic as it's being presented in the news?
Salerno: I think the Austrian perspective is one in which we distinguish between inequality that's
generated by consumers and consumer demand
any quality that are generated by what we might call
government income plundering. So, let's take the case of
the first type of inequality: generated by consumer demand. The reason why, for
example, Sam Walton,
Steve Jobs, Bill Gates,
and, going back a ways, Ray Kroc, who was the founder of of McDonalds, why they
became multimillionaires and billionaires
because they produce products efficiently that best serve consumer
wants.
So, consumers determine their incomes. Now, if we move on to government plundering
what happens is, governments
tax and they take those revenues
and they take a cut for themselves and the bureaucrats
and then they distribute them. They distribute them to different firms. They
distribute them in the form of subsidies,
contracts, and bailouts. So, companies like-
agribusiness companies like Monsanto,
defense companies like United Technologies,
Honeywell International, Halliburton and
financial institutions like AIG and Citibank.
They are all the recipients of incomes that
result from this
income plundering. So, that puts another layer of inequality on the market,
or actually changes how incomes are,
we might use the words distributed, but on the market, incomes really aren't distributed.
I'll make a point about that later.
Deist: Now, earlier this week we had a piece
as a Mises Daily article by Frank Hollenbeck talking about how central banks, in
particular our Federal Reserve,
caused huge amounts of wealth
disparity and Tom Woods has written about this as well.
This seems to be sort of a blind spot in the media because both the left and the
right
seem to be in favor of central banks and the Fed, generally.
So, can you talk a little bit about how conceptually and also mechanically
how a central bank creates wealth inequality in the US?
Salerno: Yes, what happens is that- really it starts with government deficits.
Governments always want to spend more than they take in.
When they increase their spending, their constituencies
are benefited and they get more votes, administration of power, and so on.
So, increasing spending is great, but if you increase
taxes to finance that spending, what you are going to find is that the
populous becomes-
they recognize this as take money directly from them and putting it into the pockets of
others.
So, there's a third way- or rather, a second way and that is to run government deficits.
And when you've- when the government runs deficits,
it will drive interest rates up if it borrows directly from the public,
and that had its own negative affect on the public. It becomes more expinsive to buy
housing or automobiles and so on.
So, finally we have the Fed,
the central bank. If the Fed finances those deficits
by buying government bonds, either directly or in the case of the United States they
can only buy them
indirectly, that keep interest rates down. It also
serves to allow the government to spend more money than its taking in tax
revenues.
When that happens the new money gets into the system
through the banking system, for the most part, and that expands credits,
expand the amount the banks can lend, and the money flows through
credit markets.
It benefits those who receive it first, it benefits the banks [who] themselves
now have reserves created out of thin air that they can now loan out
at interest. It causes a lot of interest
gyrations, exchange rate gyrations, and so it benefits hedge funds
and other types of of firms. So, you have a lot of
hedging against movements and interest rates and exchange rates would never
occur on a market
that was based on a gold standard or sound money of some type.
Deist: So, Frank Hollenbeck identifies this process that central banks
engage in as almost reverse robin hood.
You mentioned the early recipients of
newly created Fed monetary
expansion. Talk about the effect on the late recipients. In other words, the
inflation tax and and how the Fed process punishes savers and how that adds
to it.
Salerno: Sure, so, what happens is the money that is
low interest rates to
financial firms and so on, and they loan the money out or it's paid in
the form of government contracts, subsities, and so on
to firms. Now, those firms are able to use those funds
to purchase things before prices have risen: before there's been an inflation.
So, they benefit. They're the early recipients that you just talked about.
They then pay their workers, who also benefit because most prices have not gone
up yet,
their stockholders received higher dividends, and so on,
and capital gains, and they're able to spend the money prior to a
general increase in prices. Eventually though, let's say, Joe Salerno
sitting in New York City on
an income that's given by a university which doesn't change very frequently,
changes once a year.
I see prices going up all around me
and so do other people whose incomes aren't initially affected by the new money.
And so, they're paying higher prices for 12-months, 18-months.
Eventually, their incomes will rise, will catch up, but during that period of
time
the real purchasing power of their incomes have actually shrunk because prices
have gone up by 10%,
they can purchase 10% less. Even if they catch up
16 months later, 18 months later, they have lost
real income during that eighteen month period. So, they
were victimized by this inflationary process.
Deist: So, obviously there are particular Austrian viewpoints on this. When Mises
was writing "Socialism",
his treatise, which I believe he finished in the early thirties.
Of course, that was a time of great upheaval, and he described
sort of the socialist lefts obsession with this income equality
as what he called, an ethical postulate.
In other words, saying that the left- socialist left at the time,
in Europe and also later in America, had
sort of a big blind spot and made a grave error with respect to
not understanding the cost of income equality so-called. And that cost being that
you have a total amount of income in the country and you can't just assume that you
can
divide that up differently and that total amount on income won't
shrink as a result.
Salerno: Yeah, so you have to take a step back.
What the left sees and what the
Marxist-oriented economists of the 1930s saw,
or believe they saw, was that there was a distribution process on the market. That
income could be distributed either fairly or unfairly.
The point is, with a market there is no distribution of income.
So, for example, if I hire a babysitter for 20 hours a week
and pay her ten dollars an hour, then there's only production exchange.
There's no distribution, there's no separate distribution process. All that
has happened is that she's produced twenty hours of babysitting
services and exchange them for ten dollars an hour or two hundred dollars.
There is no distribution. The distribution occurs
when the government taxes away, let's say, one-third of her two hundred dollars
and then distributes it to agribusiness,
to defense contractors, and so on. So the distribution process comes in with
government. Now, to get your other point,
if you can if you begin to
to tax incomes what happens is that you
set up a system of incentives and disincentives.
You raise costs to firms, firms produce less,
workers will work less, if they're they're taxed, investors will
will find that a lot of their investments are being taxed away
and it's not worth the risk to invest. So, what's going to happen is that you can
have a shrinking pie.
So, you're not just going to get the distribution,
but you're also going to get, it's really a zero-
rather negative sum game, it's not just a zero-sum game
and the socialists don't understand that.
Deist: When we're making the case for markets,
we like to consider the notion that
entrepreneurs put capital at risk and that they create goods and services that
benefit all of society, all of mankind, and some of them
lose all, lose everything. Others create things like
iPhones and Cadillacs and things that we all want
and become very wealthy in the process. So, we like to think of this in terms
of,
sort of, creative destruction and new technology that benefits us.
But, today we find ourselves in an age that a lot of people view is more crony
capitalism, in other words we have subsidies,
we have bailouts, we have a lot of regulatory capture. So, as Austrians, how do we, sort
of, make the distinction between
government favoritism, which creates inequality of wealth: the Fed process you
talked about earlier,
and favorable inequality of wealth, which
derives from entrepreneurs taking risks and making society better off.
Salerno: Yes, I mean- look, any investment is is a risk. It's a leap
into the, not completely unknown future, but into a future that's
uncertain, let's say.
So, for example, when IBM was riding high in 1960s and 1970s,
and their president, at the time,
his name a been Watson, went with- they already had the technology for
personal computers
and, you know, he made a statement that [said], "well this will never go anywhere, this
will only be
a household toy or, you know, a way
your budget in a household. It'll never spread the business."
Companies like Apple said, "That's wrong. I don't care if the biggest
company
in- you know, biggest tech companies is not taking a bet on that.
I'm going to take a bet on that and eventually IBM almost went out of business in '89 and
'90, suffering
the largest losses up to that point for industrial- for
private industrial company. Whereas
Apple, Microsoft, Intel, who had taken
the bets that the the tech industry could be changing,
they earned high profits. The point is,
was that- if that lure of profits were not there,
would they have gone up against IBM? I don't think so.
And the consumers would have been much poorer for it all,
and so would business, and productivity, and investment
that this high tech revolution brought about.
Deist: Well, it's interesting, you know, Mises talked about economics- or described
economic as a
value-free science in terms of methodology and outlook. But when we're
talking about income inequality it almost seems that a
lot of our statements
and assumptions are very valued laden,
and they're full of ethical components. So, is it important for us,
as Austrians to, sort of, separate our economic analysis
from our value judgments and our valued prescriptions about how society ought to look?
Salerno: Sure, I think it's important just to stress that
income inequality in the positive sense,
is a part of the market. That is,
as consumers change their demands for various products
they are the ones that create the winners and the losers.
They're the ones who create high incomes for, let's say, tennis players
and lower incomes for pizza delivery men. There is no-
no one else is there distributing something. We don't just produce all goods
and throw them into a pile and then distribute them,
okay? It's consumers and their demands and their abstaining from buying
certain product and buying other products
that creates this income inequality. If you try to interfere with that,
you're really interfering with the prices. You're changing relative prices
and you're distorting the market. On the other hand,
I think we don't have to make a value judgment that's good or bad,
but if your favor prosperity
I think, as an economist you can say then you're in favor of
income inequality generated by the market.
You are not in favor of income plundering
that is generated by government, were income is taken from some people and
distributed to other people.
That is a negative sum game that leads to
poverty- impoverishment. It leads to
degeneration of the capital stock, it's not replaced and it just that just leads to
an economy that is
regressing and not progressing.
Deist: So Joe, to wrap up
let's go a little bit deeper into this concept of government
plundering. Can you, sort of, defined it a little more deeply and give us some examples?
Salerno: Yes. The word plundering, used in this sense, comes from Frédéric Bastiat,
the great 19th century free market economist.
We can think of it as follows:
there are producers in society and we call them
the taxpayers. Without production, there can be no payment of taxes.
And there are those who consume taxes,
and they're the government bureaucrats and the favored
firms and politicians and bureaucrats.
They're the ones that we see the subsidies, bailouts, contracts.
So, the plundering occurs when government takes
money from the producers, from the
the the taxpayers, and distributes that money
to tax consumers. These people do not
earn their wages from an other income:
from simply producing and exchanging. They
earn it by having their hands out to the bureaucrats and
and so on. Let me give an example of
the effect of
what we call government plundering or income plundering.
From 2000 to 2012,
the real median household income,
throughout the United States fell by 6%
and stands at about $51,000.
Again, at the end 2012.
In DC the real median household income,
with all the poor people in DC, it still went up by 23%
to around $66,0000. If you take
the DC metro area, which includes the Virginia
Maryland and West Virginia suburbs where the bureaucrats, contractors, and
lobbyists live,
it jumped up to $88,000. That's a difference between
$88,000
and $51,000 for median income for the country as a whole.
That puts Washington
DCS metro area at the top of the 25 most populous
metropolitan areas, at the very top,
for median household income. So, that's, I think, is one example of how the
markets distorted. How
money always flows, how income flows to the Imperial Center, you might call it.
Deist: Well, maybe the real topic we should be discussing when it comes to
income inequality, is inequality between federal government workers
an average Americans. that's but that's a good in that thanks very much
Salerno:Yeah, that's a good index. Deist: Thanks very much, Joe.
Salerno: You're welcome.