Free market is not cause of inequality

Published on Tuesday, 5 August 2014 23:51 - Written by

Free markets are under fire these days, with French economist Thomas Piketty’s “Capital in the 21st Century” on the New York Times bestseller list. But blaming free market capitalism for income inequality is misguided.

The real culprit is crony capitalism and government involvement in the markets, says the Center for Economic and Policy Research.

“For example, the [mega-banks] still exist today because the government had a policy of saving them from the market,” the Center says. “They would have managed to put themselves into bankruptcy in 2008 without huge amounts of below market loans and implicit and explicit guarantees from the government. In the wake of this history, the income and wealth of most of the financial sector can hardly be viewed as a market outcome.”

That’s not the only industry that relies on government to protect it from actual market forces.

“In the same vein, the fact that many products, most notably prescription drugs, sell for high prices is due to government granted patent monopolies,” the Center explains. “The Hepatitis C drug, Sovaldi, which is being sold by Gilead Sciences for $84,000 for a 3-month treatment, would sell for less than $1,000 in the absence of a patent monopoly. The difference is overwhelmingly a transfer from everyone else to the wealthy.”

In international trade, true market forces are warped by political factors and government actions.

“Globalization has increased inequality because of the way the government structured trade,” the Center continues. “It has designed trade agreements to put downward pressure on the wages of manufacturing workers by putting them in direct competition with their much lower paid counterparts in the developing world. It could have designed trade agreements to make it as easy as possible for people in the developing world to train to our standards as doctors, lawyers, and other professionals and then to compete freely in the U.S. market with native-born professionals. This pattern of trade would have yielded enormous benefits to the economy by reducing the cost of health care and other services, while reducing inequality. The fact that we did not go this way was a policy decision, not a market outcome.”

But one of the most clear factors that contributes to income inequality is employment, and government decisions have an immense impact on unemployment rates.

“By running a high unemployment policy the government is transferring money from low and moderate income people to the higher income people,” the Center says. “We could bring the unemployment rate down to 5.0 percent or possibly 4.0 percent with larger government deficits or a lower valued dollar, which would reduce the size of the trade deficit. The lower rate of unemployment would not only give millions more people jobs, it would also give workers in the bottom half of the wage distribution the bargaining power necessary to raise their wages. These workers would then have more money, while high income households would have to pay more for help.”

The free market isn’t perfect. But it’s not the villain it’s said to be these days.