The Real Cause of Income Divergence

The Real Cause of Income Divergence

March 27, 2017 Blog 0

The Real Cause of Income Divergence

Today, many feel that if there is something that is wrong in society, it is the governments responsibility to fix it. Actually, it should be the other way around. Getting government out of the arena will fix the problem. Government interference magnifies inequality. It is only the free market system that can promote equality.

The mantra for the past twenty years has been, “The rich are getting richer and the poor are getting poorer.” That is a correct statement. Until the 1970s, the growth of income in each quintile was about the same. The family income of the rich and poor were increasing at the same percentage. Starting in the 1970s, the trajectory of the increase in family
income from the top to the bottom started to separate. Figure 1 shows the income inequality. The 95th percentile is the top 5% of family income. The median is the middle. The 20th percentile is the bottom 20% of families which is essentially those below the poverty line.

What changed in the 1970s to cause the divergence of income trajectories? It was the size and reach of government. Presidential cabinet departments that directly affect a majority of the citizens have been established in the last fifty years. The table below is a list of recently established presidential cabinet departments. I am including the Environmental Protection Agency (EPA) in the list even though it is not a cabinet level department. It has a greater impact on citizens and the economy that most cabinet level departments.

Earlier cabinet level departments include: State, Treasury, War (Defense), Attorney General, Interior, Agriculture, Commerce, and Labor. These were limited in their scope of authority, and any regulations did not impact all areas of the economy.


An indicator of the activity of the departments is the number of regulations they produce. Figure 2 shows the number of pages published in the federal register each year from 1936 to 2015.
In the 1970s, the number of regulations increased significantly. The graph shows the number of new pages published each year, so the actual size of the federal register has increased exponentially.

The Heritage Foundation has been publishing an annual Index of Economic Freedom for many years. The purpose of the Index is clearly stated in its Forward, “The Index, a data-driven, comprehensive assessment of economic freedom in countries on every continent, is about more than just country rankings. It is an exploration into the sources of enduring economic dynamism and how they relate to each other in ensuring opportunities for the greatest number of people.”

Here are three quotations from the 2016 Index of Economic Freedom. “The U.S. is the only country to have recorded such a sustained loss of economic freedom in recent years, and the causes of the decline are clear. The overall U.S. score decline over the past decade is 5.8 points on the Index’s 100-point scale.”

“Substantial expansion in the size and scope of government under the Obama Administration, including through new and costly regulations in areas like finance, health care, and the environment, has hit wide swaths of the economy, affecting almost every American in some way and reducing opportunities for non-governmental production and investment. The growth of government has been accompanied by increasing cronyism that has undermined the rule of law and perceptions of fairness.”

“America has become the land of overregulation, with its entrepreneurial vitality increasingly drained by the massive expansion of the administrative state. The scope and cost of escalating red tape has been a major factor in lackluster job creation in recent years and holds back innovations that could increase productivity. Since early 2009, more than 180 new major federal regulations have been imposed on business operations at an estimated annual cost of nearly $80 billion. Each new edict has meant new government bureaucracy that entrepreneurs and producers must navigate.”

I believe there is a direct correlation between the size of the federal government and the constraint on income. The top income earners will always be able to adjust to whatever obstacles that the government puts in their way, so their family incomes continue to rise even with government regulations. The bottom income earners are now entirely dependent on government programs. They have become serfs to centralized government, because they are unable to adjust to government regulations. The middle income earners are also having trouble adjusting to government regulations. Small business growth has slowed for the same reason.

Contrary to what the mainstream media and the liberals inside and outside of government proclaim and would have you believe, it is liberal policies that are making the rich richer and the poor poorer. It is only with conservative, free market principles that the divergence can be reversed.