Intervention increases Income Inequality
Post #1080
When St. Louis Federal Reserve researcher, Christian Zimmerman, looked at the growth in median household income since 1984, he found out that it was below the growth in GDP per household:
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While the numbers tracked really well during the capitalist Reagan years, they started deviating under the interventionist (anti-capitalist) policies of Clinton, Bush, and Obama. The GDP growth per household is an arithmetic average: GDP growth, divided into all households. The median household income is the “middle number.”
The final result was that, by 2023, GDP per household had grown by 79.5%, but the median household income had only grown by 36.8%. This is the result of heavy intervention into the economy, where government cronies receive outsized benefits from policy enactments. An example is ObamaCare, which enriched insurance firms.
The median of a set of values is the 50th percentile of those values, such that half of all values sit below the median and half of them sit above. The mean of a set of values is an arithmetic average of the values: the sum of values divided by the number of values. When income inequality grows, the gap between the mean and median grows:
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In 1974, the ratio of mean-to-median income was where it is “supposed to be” in a free market (mean income under 40% higher than median income) — and note how it was relatively stable during the capitalist Reagan years, capped off where mean income was about 40% higher than median income, reflecting low income inequality under Reagan.
But after heavy interventionist policies (under Clinton, Bush, and Obama) had benefitted government cronies at public expense, the mean income is now over 50% higher than the median income, reflecting increased income inequality. A proper income distribution — seen in free markets — has a mean just below 40% higher:
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NOTE: the mean is at about 1.1 and is located at the second dark-green bar, but the median came before it at about 0.79, at the right edge of the yellow bar
The distribution above has strong, positive skew, like income is supposed to have (highly-productive people are supposed to be paid more). The bulk of incomes are expected to be relatively low, with a few high incomes off to the right. The scale at bottom could be fitted to incomes, such that X=1 might mean income of $45,000 or so.
And then X=2 would mean an income of about $90,000 a year.
While this graph shows the income distribution that we are “supposed to have” — based on the distribution noted prior to heavy economic intervention — the situation in 2023 is far worse than what shows in this graph. Most importantly, we do not need a Great Reset to fix this. Simply returning to free markets will balance things out.
In a free market, highly-productive people get paid accordingly, resulting in a ratio of mean to median income of somewhere around 1.4. The distribution of productiveness among human beings gives rise to the ratio. But in recent times, people are not getting paid according to how well they serve other members of society.
In recent times, people have been getting paid based on government graft. An example is the artificial “health exchanges” which created health insurance markets with less competition than what they had before, allowing those few insurance firms, who got in bed with government, a windfall of outsized profits.
To get back to the Goldilocks (not too hot, not too cold, but just right) level of income inequality which is supposed to exist based on the differential productivity of individual human beings, all that we need to do is return to free enterprise. This means a drastic reduction in the size and scope of the federal government.
Reference
[Disparity in growth of GDP per household vs. median household income] — https://fredblog.stlouisfed.org/2016/12/the-puzzle-of-real-median-household-income
[median personal income] — U.S. Census Bureau, Median Personal Income in the United States [MEPAINUSA646N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MEPAINUSA646N
[mean personal income] — U.S. Census Bureau, Mean Personal Income in the United States [MAPAINUSA646N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MAPAINUSA646N