Hate Income Inequality? Free the Markets

Income inequality has been an on-again, off-again hot button issue in the US for several years now.  There exists one method that could be easily enacted that would move to reduce the transfer of wealth from the relatively poor to the relatively rich: enact free trade.

Trade protectionism in the US (that is, using tariffs, quotas, or other means to limit imports in order to protect domestic firms) is probably the largest source of wealth transfer from the relatively poor to the relatively rich.

How does it work?  A tariff, like any tax, raises the cost of goods imported.  The goal of which is to make the cost of the imported good above the cost of the domestic competitor, so the domestic competitor now has the edge.  However, who pays the price?  The consumer does.  Whereas before the consumer had the choice of a lower-cost item, now they do not.  The relative purchasing power of the consumer has fallen, while the profits of the protected industries has risen.  The owners of the firms have gotten richer while the consumer has gotten poorer.

Of course, the proponents of such actions will argue the increased profits will “trickle-down” to the rest of us in the form of jobs, but it is a high cost to pay.  As I discussed before, the cost per job saved from tariffs is especially high, even when factoring in the cost of welfare.  In reality, most of these excess profits stay in the pocket of the business owners (after all, what incentive have they now to improve?).

Another important thing to remember is that these costs are borne disproportionately upon the low-income folks.  This is true of any consumption tax, given that the relatively poor spend a greater percentage of their income than the relatively rich.  Last year, sugar tariffs alone cost the US consumer about $1.4 billion.  For a relatively wealthy person, paying an extra $0.06/lb of sugar is not a major issue.  However, for someone on a strict budget, it is.

Protectionism is a double-whammy against the poor: it increases their prices for no reason, and the gains go right into the pockets of the relatively rich, increasing their income.  One of the best acts the US government could take to address income inequality is to remove all tariffs right now.

9 thoughts on “Hate Income Inequality? Free the Markets

  1. You make a good point that rarely gets mentioned during income inequality discussions. That is, income inequality in and of itself is not a “problem” that needs to be “solved,” but only when the inequality results from non-market phenomena (like the tariff) does it need to be addressed.

    Don Watkins has a new book coming out which I’m excited to read, called “Equal is Unfair: America’s Misguided Fight Against Income Inequality.” Here’s a taste of it: https://medium.com/@dwatkins3/turning-the-tables-on-the-inequality-alarmists-564c52f2629f

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  2. I have to hand it to the people who have turned income inequality into the term of normal usage in the debate. Inequality implies that something is out of balance and needs to change to be equal.

    Those who get to define the terminology often get to determine the outcome. Does anyone have any suggestions for a more neutral term than inequality?

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