In the United States, there has been a great increase in wealth from the middle class to the top one per cent, the ultra-high net worth individuals. This has caused wealth inequality and democrats running for presidency want to tackle this issue.
Wealth inequality has risen in the US in the last decade buy by far less than democrats and media articles are implying. The most frightening claims about inequality stem from the flawed information produced by Economist Thomas Piketty. Other economists reveal modest changes in inequality given the massive revolutions in globalisation and technology that have occurred.
Most of the recent rise in wealth inequality is due to innovations in our economy that are pulling everyone up. A prime example of this is the multibillion-dollar app WhatsApp created by Jan Koum and Brian Acton. Their success may have increased the wealth of the top wealthiest individuals but WhatsApp has produced massive consumer value as well. Just like the aforementioned individuals, America’s wealthiest entrepreneurs have boosted economic growth in a similar way. But the wealth created this way is not the zero-sum problem that democrats imagine it is. All this is good to hear and good for the system.
The negative side of things is that the government produces wealth inequality in these two ways.
- Governments give subsidies, regulatory preferences and other benefits to wealthy insiders. Leonard Francis, in the Fat Leonard Scandal, gained millions of dollars of government contracts by providing gifts, prostitutes and other favours to Navy officers to do whatever he wanted.
- Governments fuel wealth inequality is through the expansion of social programs which has undermined incentives for lower to middle-income families to save reducing the ability to save because of higher taxes. Government programs have displaced wealth-building by all American families, except the richest.
Politicians like Senator Bernie Sanders and Elizabeth Warren complain about wealth inequality when in fact their policies are actually generating it. The problem receives little policy attention but it reveals the hypocrisy of the political left.
Social Security and heavy wage tax discourage most American families to save for their retirement. Social Security accounts for a larger share of retirement income for the lower to the middle class than for the rich, so this displacement effect increases inequality.
Some models were built to estimate the causes of rising wealth inequality in the US alone. These studies found that most of the rise in the top one per cent share of wealth was caused by technological evolutions and wage dispersion, but the expansion of Social Security and Medicare caused one-quarter of the increase. The conclusion? According to these studies:
Redistributive nature of transfer payments was instrumental in curbing wealth accumulation for income groups outside the top 10% and, consequently, amplified wealth concentration in the U.S.
This and more examples are why it’s wrong for politicians to complain about wealth inequality and then demand EU-style expansions in US social programs. The larger the welfare state, the more inequality there will be.
The solution would be to transition to savings based social programs. Countries like Chile have Social Security systems based on private savings accounts and unemployment insurance savings accounts. A savings-based approach to Medicare should be considered. Assets in such savings accounts would be inheritable, unlike the current social programs and their benefits.