So far as people know, this is the advantage of market capitalism. However, the U.S. has the worst income inequality of all of the western developed countries in the world while at the same time having arguably the free-ist market capitalism economy in comparison to the U.S.’s European counterparts who have more expansive social welfare programs like tax funded health care for all people.
So then, the incentives are lacking considering the economy functions in a manner that allows wealth to be concentrated in the hands of the top 10, or even the top 1, percent of people in the U.S. Therefore, that type of wealth accumulation reveals a flaw in these so-called incentives.
It would be understandable if the economy was flourishing and expanding even with this extremely large gap in income inequality, but that is not the case. In fact inflation in the U.S. is at historic lows, to the point where the markets and economists alike are not certain that it is a wise idea for the FOMC Chair Janet Yellen to raise the Fed Funds interest rate off of the lower bound. The FOMC inflation target that they cannot even reach is only 2%! People, not even the FOMC it seems, do not appear to be confident that the 2% level of inflation can be reached (Yellen’s News Conference…, Bloomberg).
Inflation comes with rising wages and prices. However, the U.S. economy has had near stagnant inflation in recent years, and wage increases have also been nearly stagnant. The FOMC anticipates inflation (and inflation is difficult to see), and if inflation comes along without the proper measures being take there can be extreme inflation which is bad for the U.S. economy, the FOMC still does not see inflation rising to its tiny 2% target until 2018 (Yellen…Bloomberg).
For example the consumer will feel uncertain about the future, so the consumer will spend less. Then producers will see consumers spend less, so then producers produce less. Then government officials may think that producers will make less profit if they produce less to sell to consumers, so the government officials may increase taxes on consumers and producers alike in order to balance the budget. Then as a result of the government’s action, consumers can grow still more uncertain about the future and as a result choose to cut back spending again. Then producers may see that consumers will again spend even less, so producers will again react to the actions of consumers by cutting production again. Then the government would repeat coming to the same conclusion, raise taxes to balance the budget, which in turn could scare consumers again who spend even less again, and the cycle you can see can repeat itself over and over again. And every time one of those three actions by the consumer, producer, or the government is taken, the economy would shrink again and again and again, in a vicious never ending cycle.
I am not an economist capable of building models and applying econometrics to such a question, yet, if it is possible, then it should be done, because the sales pitch of free-market capitalism is that in the long-run it will benefit everyone in the economy the most. Since this does not seem to match-up with reality, the course of action that should be followed should be whichever yields the best economic benefit, even if that is social health programs or better income distribution facilitated by the U.S. government.
The U.S. government leveraged the U.S. taxpayer to prevent financial markets that are integral to the global system from collapsing in on themselves as a result of their own largesse. This bailout of the financial markets by the Government’s leveraging of taxpayers wealth is beyond strict market capitalism. I agree with the actions taken by the government because it was for the good of the entire system, and on the whole the largest amount of people would be better off as a result of the government bailouts. And that is what matters in Economics to me; the most people benefitting overall is what is most important to accomplish when possible. To hell with strict philosophical Economics that seeks to maximize the most profit, even if that profit only goes to 1% of people. With that kind of Economic philosophy, slavery should never have been absolutely abolished, since after all slave labor is the cheapest labor of all if it is used in the most efficient market for slave labor. I am not for slavery, and therefore I am for government interference when it can benefit the most people.
Now that I have described the good reasons why I am in favor of the government’s interference committed in the midst of the financial crisis of 2008-2011, I will say that I am for government action in solving the problem of income inequality. Most especially because the U.S. taxpayer was leveraged to save the financial market even though it was the financial markets that made the mistakes, so then the least the average taxpayer can receive in return is a smaller and healthier gap in income inequality. The most important reason why it is a good thing if the government intervenes to improve income inequality is because it will help benefit the most of amount of people, and in the end will not hurt Economies in a way that matters. Slave-owners in the U.S. did not want to see slavery abolished because it would make them lose profit, so too the 1% do not want to have a smaller gap in income inequality because it will make them lose a little more of their vast wealth relatively. I do not care for the slave owner’s maximization of his profits because the slave-owner commits evil on masses of people, and for the same reason I do not care if the profits of the top 1% are maximized either.
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