How Free Markets Can Address Income Inequality – Pacific Research Institute

How Free Markets Can Address Income Inequality


We support free markets not because some 18th- or 19th-century European philosopher said they’re great. Rather, we support a free market system because experience has shown it delivers more opportunity and prosperity to Americans than any other economic system.

That’s not to say that we are blind to the current discussion of economic inequality in our country today.

A central promise of American life is that if you work hard, you can move up in the world and help your kids to live a life better than your own. Yet for too many Americans, particularly those living in our inner cities and rural areas, this promise often goes unrealized.

There are myriad statistics that make clear this point. Perhaps most shockingly, after adjusting for inflation, today’s average hourly wage has roughly the same purchasing power that it did back in 1978, more than a generation ago.

Of course, a simple statistic like this obscures many facts that can be called upon to make this picture rosier, such as the increasing quality of goods and services over time and increases in the average number of earners per household in many communities.

But the simple fact is that while our real GDP-per-capita has more than doubled since 1978, the average worker is not taking home appreciably more pay. Understandably, this opens the door to skeptical questioning on how exactly this came to be.

Part of this mystery can be explained by the divergence between worker productivity and worker pay in the 1970s. From 1973 to 2017, net productivity rose by 77 percent, while the hourly pay of workers rose just 12 percent over the same period after adjusting for inflation. This fact alone can likely explain part of the rise in both left- and right-wing populism, centralized around the fact that workers are producing almost 80 percent more goods and services while only making about 10 percent more in income.

Looking at it from a broader lens, the proportion of our national income received by workers has fallen from nearly 65 percent in 1974 to 57 percent in 2017. This monumental shift in the flow of income has not been offset by increasingly progressive income or wealth taxes, nor should it be.

The answer to these long-term trends is not to depress economic growth through oppressive taxation and incentive-destroying redistribution schemes. But neither should we pretend that any income distribution produced by the market is inherently good or correct simply because the economic system that produced it is the best available.

There are solutions to this problem, and they are at their core based on a belief in the dignity, value and potential in every human life. Wage growth and prosperity in a free economy are driven by education and skill development.

Do you have the skills to provide people with things they want better and cheaper than their alternatives? By developing human capital through evidence-based reforms of our K-12 system and growth in high quality (including online) vocational training and college education, we can prepare every American to win their future.

The combination of promoting the development of highly valuable skills at the individual level with a renewed commitment to time-tested virtues like prudence and family stability will lay the building blocks to build generational wealth for families in every community.

These changes will not be easy, and the problems we need to address are not simple. But as defenders of liberty, we must see the world as it is rather than as we would like it to be. We must be proactive in sharing free market solutions to the very real problems we face.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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