 So Joe I noticed that recently this topic of income inequality seems to be all over the news President's been talking about it as a sort of a touchstone of his second term right the new very left-wing mayor of New York City Has called it a priority Even the Pope has been out there speaking publicly about income inequality So I'd like to just ask you sort of generally what would be an Austrian perspective on this How should we think about the topic as it's being presented in the news? I think the Austrian perspective is one in which we distinguish between Inequality that's generated by consumers and consumer demand and inequality. That's generated by what we might call Government income plundering. So let's take the case of the first type of inequality generated by consumer demand The reason why for example Sam Walton Steve Jobs Bill Gates and going back a ways Ray Kroc who was the founder of McDonald's why they became Multi-millionaires and billionaires it's because they produce products efficiently that best-served consumer wants so consumers determine their incomes Now if we move on to government plundering what happens is government's tax and they take those revenues and They take a cut for themselves and then bureaucrats and then they distribute them they distribute them to different firms They distribute them in the form of subsidies Contracts and bailouts so companies like Agribusiness companies like Monsanto Defense companies United Technologies Honeywell International Halliburton and And company, you know financial institutions like AIG and Citibank They are all the recipients of incomes that have result, you know that result from this income plundering so that puts another layer of inequality on the market or actually changes how incomes are We might use the word distributed, but but on the market incomes really aren't distributed. Well, I'll make a point about that later Okay Now really this week we had a piece as a Mises daily article by Frank Hollenbeck talking about how central banks in particular our Federal Reserve caused huge amounts of of wealth disparity and Tom Woods has written about this as well But there seems to be sort of a blind spot in the media because both the left and the right Seem to be in favor of central banks and the Fed generally. So can you talk a little bit about how? Conceptually and also mechanically how a central bank Creates wealth inequality in the US. Yeah, what happens is that it really starts with government deficits Governments always want to spend more than they take in when they increase their spending their constituencies are Are benefited and they get more votes administration and power and so on so increase expending is great But if you increase taxes to finance that spending what you're going to find is that the you know the populace becomes You know, they recognize this as taking money directly from them and putting it into the pockets of others so There's a third way or rather a second way and that is to run government deficits and When you the government runs deficits, it will drive interest rates up if it borrows directly from the public and That has its own negative effects on the public. It becomes more expensive to buy houses and automobiles and so on So finally we have the Fed the central bank If the Fed finances those deficits by buying government bonds either directly or in the case of the United States They can only buy them indirect indirectly that keeps interest rates down It also serves to allow the government to spend more money than it's taking in tax revenues when that happens the new money gets into the system through the banking system for the most part and that expands credits expands the amount that banks can could lend and The money flows through credit markets. It benefits those who receive it first. It benefits the banks themselves who now have Reserves created out of thin air that they can now loan out at interest It it causes a lot of interest Gyrations exchange rate gyrations and so it benefits hedge funds and other types of firms So you have a lot of of hedging against movements and interest rates and exchange rates that would never occur on a market That was based on on a gold standard or sound money of some type Okay. Well, so Frank Halenbeck identifies this process that central banks engage in is almost a reverse Robin Hood you mentioned sort of the early recipients of newly created Fed Monetary in expansion Talk about the effect on the late recipients in other words the inflation tax and and how the Fed process Punishes savers and how that adds to sure. So what happens that the the money that is the loan that loan low interest rates to To to you know financial firms and so on and they loan the money out Or it's it's it's paid in the form of government contracts subsidies and so on to to firm now Those firms are able to use those funds To purchase things before prices have risen before there has been an inflation. So they benefit They're the early recipients that you just talked about They then pay their workers who also benefit because most prices have not gone up yet their stockholders received higher dividends and so on and Capital gains and they're able to spend the money be prior to a general increase in prices eventually though, let's say Joe Salerno sitting in New York City on a fixed Or on on an income that's given by University, which doesn't change very frequently changed once a year Though I see prices going up all around me and so to other people whose incomes aren't initially affected by the new money And so they're paying higher prices for 12 months 18 months Eventually their incomes will rise and we'll catch up But during that period of time the real purchasing power of their incomes have actually shrunk because if prices have gone up by 10% They can purchase 10% less even if they catch up 16 months later 18 months later They have lost real income during that 18 month period. So so they were they were victimized by this inflationary process So obviously there are particular Austrian viewpoints on this when Mises was writing socialism His treatise which I believe you're on the finish in the early 30s Of course, that was the time of great upheaval and he described sort of the socialist left's obsession with this income equality as What he called an ethical postulate in other words Saying that the left the socialists left at the time in Europe and also later in America had Sort of a big blind spot and made a grave error with respect to not understanding the cost of income Equality so-called and that cost being that you have a total amount of income in a country And you can't just assume that you can divide that up differently and that the total amount of income won't shrink as a result Yeah, so you have to take a step back what the left sees and what what what the Marxist oriented economists of the 1930s saw was or believe they saw was that there was a Distribution process under the market that that Income could be distributed either fairly or unfairly, but the point is with the market There is no distribution of income So for example, if I hire a babysitter for 20 hours a week and pay her ten dollars an hour Then there's only production in exchange. There's no distribution. There's no separate distribution process all that has happened is that she's produced 20 hours of babysitting services and Exchange them for ten dollars an hour or two hundred dollars. There is no distribution the distribution Occurs when the government taxes away Let's say one-third of her two hundred dollars and then distributes it to agribusiness to defense Contractors and so on so the distribution process comes in with with with the government now to get to your other point in if you if you begin to to tax and Incomes what happens is that you you set up a system of incentives and disincentives You you raise costs to firms firms produce less workers will work less if they're they're taxed Investors will will find that a lot of their investments are being taxed away and it's not worth the risk to invest So what's going to happen is that you're going to have a shrinking pie? Okay, so you're not just going to get the distribution, but you're also going to get It's really a zero rather a negative sum game. It's not just a zero sum game And the socialists don't understand that Well, when we're making the case for markets, yes We like to consider the notion that entrepreneurs put capital at risk and that they create goods and services that benefit all of society All of mankind and some of them Lose all lose everything others create things like iPhones and Cadillacs and things that we all want and become very wealthy in the process So we like to think of this in terms of sort of creative destruction And new technology that benefits us but Today we find ourselves in an age that a lot of people view as more crony capitalism in other words We have subsidies we have bailouts. We have a lot of regulatory capture. So as Austrians, how do we sort of make the distinction between? Government favoritism which creates inequality of wealth the Fed process you talked about earlier and and favorable inequality of wealth which derives from entrepreneurs taking risks and and making society better off Yes, I mean look any investment is a risk It's a leap into the not completely unknown future, but into a future that's uncertain, let's say so for example when IBM was riding high in the 1960s and 1970s and their president at the time His name may have been Watson when they already had the technology for personal computers and You know, he made a statement that well, this will never go anywhere. This will only be A household toy or you know a way to keep your you know your budget in a household. It'll never spread the business Companies like Apple said that's wrong. I don't care if the biggest company in you know, the biggest tech company Is not taking a bet on that. I'm going to take a bet on that and eventually IBM almost went out of business in in 89 and 90 suffering the largest losses up to that point for industrial for private industrial company Whereas whereas Apple Microsoft Intel who had taken the bets That that the tech industry to be changing they they earned high profits The point is was that if that lure of profits were not there Would they have gone up against IBM? I don't think so and The consumers would have been much poorer for it all and so would business And and productivity and investment that that this this high tech revolution brought about Well, it's interesting, you know Mises talked about economics who described economics as a value-free science In terms of methodology and outlook, but when we're but when we're talking about income inequality It almost seems that a lot of our statements and assumptions are very value laden And they're full of ethical components. So it was important for us as Austrians to sort of separate our economic analysis from our value judgments and our value prescriptions about How society ought to look? Sure. I mean, I think it's important just to stress that income inequality In the positive sense is a part of the market. That is As consumers change their demands for various products They are the ones that create the winners and the losers They're the ones that create high incomes for let's say tennis players and lower incomes for a pizza delivery men There is no no one else is there distributing something We don't just produce all good to throw them into a pile and then distribute them Okay, it's consumers and their demands and and and they're abstaining from buying certain products and buying other products That creates this incoming inequality if you try to interfere with that You're really interfering with the price system. You're changing relative prices and you're distorting the market On the other hand, I think we don't have to make a value judgment that that's good or bad But if you're in favor of prosperity I think as an economist you can say then you're in favor of the income inequality generated by the market You are not in favor of income plundering That is generated by government where income is taken from some people and distributed to other people That is a negative sum game that that leads to poverty impoverishment it leads to Degeneration of the capital stock. It's not replaced and it just it just leads to an economy that is Regressing and not progressing So Joe to wrap up, let's go a little bit deeper into this concept of government plundering Can you sort of define it a little more deeply and give us some examples? Yes, the word plundering used in this sense comes from frederick bastia at the great 19th century free market economist We can think of it as it as follows There are producers in society And we call them they're the taxpayers without production There could be no payment of taxes and there are those who consume taxes Okay, and they're the government bureaucrats and and and the favorite the favorite firms of politicians and bureaucrats They're the ones that receive the subsidies bailouts and contracts So the plundering occurs when when when government takes money from from the producers from the from the tax payers And and distributes that money to tax consumers These people do not earn their wages from from and other incomes from simply producing and exchanging They they earn it by having their hands out. Okay to the bureaucrats and and and so on Let me give you an example of of of the effect Of of of what we call a government plundering or income plundering From 2000 to 2012 Um the real median household income Uh throughout the united states Fell by six percent and stands stands at about 51 thousand dollars Um again at the end of 2012 in dc The real median household income with all the poor people in dc. It still went up by 23 To around 66 thousand dollars if you take The dc metro area Which includes the virginia maryland and west virginia Suburbs where the bureaucrats contractors and lobbyists live It jumped up to 88 thousand dollars. That's a difference between 88 thousand and 51 thousand for for for median income for for the country as a whole and the um That puts washington dc and its metro area at the top of the 25 most populous Metropolitan areas at the very top For median household income So that's I think is is one example of how the market's distorted how how money always flows How income flows to the imperial center, we might call it. Well, maybe the real Topic we should be discussing when it comes to income inequality is the inequality between federal government workers and average americans Yeah, that's that's a good index. Thanks very much. You're welcome