This file is a short political-economic essay by Hans F. Sennholz, dated September 1996, on the widening U.S. income gap. Its scope is narrow but polemically ambitious: it interprets rising income disparity not as a market failure requiring more redistribution, but as evidence that fiscal, monetary, tax, and regulatory intervention produce effects opposite to their declared egalitarian aims.
Sennholz opens from official income-distribution statistics, noting that the share of national income going to the top fifth of households rose sharply from 1968 to 1994. His first move is to concede the phenomenon before disputing its usual explanation.
No matter how you may gather the data, the gap between the most affluent Americans and everyone else is widening.
The essay then turns against legislators and regulators who respond to inequality with taxes, spending, and regulation. Sennholz frames the irony historically, from Roosevelt’s New Deal language through Johnson’s “war on poverty” and Clinton-era tax increases on upper incomes: vast redistributive efforts have not narrowed the gap. For him this is not accidental but causal.
It is ironic that the spenders create the very pressures that cause interest rates to rise and capital income to soar.
His central conceptual move is to connect public deficits to capital consumption. Deficit spending, he argues, crowds out private investment, reduces the stock of productive capital available to labor, and thereby depresses wages while raising returns to capital. Inequality grows because government policy simultaneously weakens labor income and strengthens capital income.
After all, it is the amount of capital invested that determines productivity and wage rates; to consume capital is to destroy jobs and depress wage rates.
The structure of the essay proceeds through a sequence of reinforcing causes. First comes low net saving, which Sennholz attributes largely to public-sector deficits. Next comes Federal Reserve policy, which he accuses of inflating asset prices. Falling real wages and disappearing manufacturing jobs are contrasted with extraordinary stock-market gains, most of which accrue to affluent households.
For several years it conducted easy money policies that pushed stock and bond prices to dizzying heights and created a financial bubble, perhaps the biggest ever.
He then adds corporate taxation and regulation to the same causal chain. By making expansion costly, government pushes firms toward downsizing, mergers, computerization, and labor shedding. These changes may raise profits and reward skilled workers while displacing less-skilled labor, widening the income gap. Finally, he incorporates household demographics: as married, educated women enter the labor force, dual-professional households pull further away from lower-income families.
The essay’s relevance lies in its Austrian/free-market inversion of the standard inequality debate. Sennholz does not deny income disparity; he redescribes it as the unintended but predictable consequence of anti-market policy. The argument culminates in a general principle about intervention.
No matter how we may look at the growing disparity of incomes, it confirms a well-known economic principle: political intervention in economic life is bound to make matters worse.
The closing section broadens from policy mechanics to a claim about “human nature.” Sennholz argues that individuals differ radically in productivity and that competitive incomes tend to reflect the value of services rendered. Redistribution can interfere with this process, but cannot abolish the underlying differences; market forces reassert them in altered form.
Any policy that seeks to deny or defy human nature is bound to disappoint.
Thus the essay’s thesis is not merely that inequality rose in late-twentieth-century America, but that interventionist attempts to reduce it—deficits, redistribution, monetary expansion, taxation, and regulation—helped produce it. Its final conceptual contrast is between political force and economic law: policy seeks equality by extraction, while capital, productivity, interest, and incentives redirect those efforts into renewed disparity.
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