The Stock Market Record, Income Stagnation, and the Regulatory Welfare State

Why have the middle and lower income groups stagnated in the past decade, while the upper income groups flourished? Why this dichotomy? Is it because the Republican's policies "favor the rich," as the NJ Star-Ledger claims in its editorial Dow Has Recovered, but Most Americans Have Not? After saying that "the success of those at the top is welcome," the editors note:

But something is fundamentally wrong when most Americans are losing ground, despite their hard work and growing productivity. Worse, social mobility in America has slowed dramatically.

The editors cite several factors:

The causes of this economic failure are complex. Technology and global trade have added to the nation’s total wealth, but have undercut the position of unskilled Americans. The dramatic decline of marriage in only a few generations is a leading cause of child poverty. The withering of the labor movement has allowed business owners to reduce wages and benefits. And the uneven performance of our education system has aggravated the divide. 

Add to this the consistent push by Republicans to favor the rich over the rest, and you have a real mess. The ill-timed austerity program they have triggered by refusing to yield an inch on taxes, even to close loopholes favoring the wealthy, is the latest example. It will slow the sluggish economy and cost roughly 750,000 jobs this year, according to the Congressional Budget Office.

My comments:

Leaving aside the dubiousness of some of its claims, the editorial board is correct in its conclusion: "[L]et’s not mistake [the Dow's record high] as a sign of economic health. This economy is broken, even if Wall Street is not." But, we must not evade the elephant in the room. 

In the last 3 decades, government regulations have risen by 40% in terms of pages of the federal registry, 63% in terms of regulatory agency employment, and 95% in terms of regulatory agency enforcement spending. Regulations increased significantly under W. Bush, starting with Sarbanes-Oxley, reaching a peak at the very onset of the financial crises.  They have since exploded under Obama.

Small businesses create the most jobs, especially the all-important entry-level jobs. But, it's become much harder to start a business, according to Subway founder Fred Deluca, who acknowledged that he could never have started his business in today's environment. In addition to regulations, licensure cartels inhibit entry into countless fields. The number of occupations requiring a government license (i.e., government permission) rose from 80 in 1980 to 1100 in 2008--including many occupations that benefit lower-income, lower-skilled workers. These licensing boards are typically staffed by people with a vested interest in restricting the supply of workers in their fields so as to drive up prices. 

It's no surprise that compensation is stagnating at the lower and middle end. More out-of-work people competing for fewer jobs puts downward pressure on wages and salaries, as basic economics teaches. Couple the increasing difficulty in getting started because of regulations with the increasing disincentives to work created by the welfare state, not to mention the increasing government spending drain on the nation's savings (investment capital), and the growing split between those who are economically established and those struggling to get started should be no surprise. Growing government favors the first group, and hinders the second.

It's no coincidence that this editorial is written just as the regulatory welfare state reaches its highest peak ever. One should logically conclude that rolling it back is the solution. Economic freedom--lower taxes, less regulations, less government spending--favors every productive person, in particular those at the bottom of the economic ladder. People need to be free to act on their own judgment and trade freely for an economy to flourish, both as a practical matter and as a moral imperative. Instead, they have been increasingly hindered by coercive interfering government. Our economy is being trampled by the elephant that big government apologists refuse to see.

I don't think I buy the argument that the average American is not better off than they were 20 years ago. Less well off than they otherwise would have been, maybe. But worse off? Better quality cars and medical care and the internet and the technology revolution, more and better restaurants, to name a few things, have made our lives immeasurably better. Remember, it's real income--how much your money can buy--that is the true measure of income.

Related Reading:

The Evil Genius of the Welfare State

On America's "Social Contract," the Source of Individual Character, and Romney's 47% Comment