Unequal Incomes by Force

And I get so tired when I have to explain
When you're so far away from me
See you've been in the sun and I've been in the rain
And you're so far away from me
--Dire Straits

As these pages have observed, income inequality is not a bad thing when it occurs naturally. In fact, it is an essential feature of a thriving market economy. The specter of higher incomes motivates producers to become more productive. When producers are compensated (by consumers) for being more productive (either thru innovation or efficiency gains), then standard of living improves for all.

Problems arise, however, when income inequality is increased by force. "Huh?," you ask, "I thought income equality is what bureaucrats seek to achieve by force--using, for example, socialist tactics of re-distribution."

Yes, but while income equality can be forced, so can income inequality. The primary platform for increased income (and wealth) inequality is central bank policy. Whenever the Fed and other central banks ease monetary policy, which requires force to do so, then incomes become more unequal.

When rates are forced lower, financial assets like stocks and bonds are bid higher. Wealthy individuals, who tend to own more financial assets, benefit in an out-sized way compared to people of lesser means. Moreover, people of lesser means, who commonly climb the first few rungs of the economic prosperity ladder by saving more of their incomes in interest-bearing accounts, get paid less for doing so. With less incentive to save, many lower income people save far less than they otherwise would--and may even take on more debt since the cost of borrowing has been forced lower. Yet, more debt and less saving is precisely the opposite of what poorer people need to do to boost income and wealth over time.

Another group that benefits from easy monetary policy is the financial sector. Because banks, brokers, et al. get first dibs on newly created cash and credit money by central banks, they can buy things (financial securities in particular) while prices are still low and then profit handsomely as prices rise when those lower in the food chain subsequently get their hands on the money and bid things higher in an inflationary cycle.

With central bankers engaged in the most radical monetary policies that the world has ever seen, we can be confident that these policies have forced income distribution markedly wider in their wake.