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How neoliberalism has caused income inequality

Clara Dewey
Jun 21, 2017 · 3 min read

Today the U.S. experiences significant income inequality, with the richest one percent of the population holding more wealth than the bottom eighty percent. One possible explanation for the rise in income inequality is the emergence of neoliberalism: the implementation of policies meant to privatize the economy. It is no surprise that neoliberalism thrives in America, as the idea of a free-market economy is central to the American identity and “American Dream” — the belief that anyone can work their way to wealth and success. However, neoliberalism increases income inequality by rewarding those who are already wealthy, while providing fewer nets for poorer populations to fall back on. A person born into wealth may find it easier to receive a college education, access a wealthier network, and consequently land a higher paying job. In contrast, individuals from low income communities cannot access those same opportunities nor advance their socioeconomic status.

In order to understand how neoliberalism has led to income inequality in the United States, one must first understand how neoliberalism emerged as a dominant economic theory. Following the end of World War II, when people were concerned about preserving social security, most of the globe followed a Keynesian or Marxist philosophy in which the state managed a large part of the economy and citizens were apportioned significant amounts of social protection. However, as Alexander Stille states in The Paradox of the New Elite, following “the protest movements of the 1960s and early 1970s… think tanks dedicated to defending the free enterprise system — such as the Cato Institute and the Heritage Foundation — were born.” In A Short History of Neoliberalism, Susan George affirms this shift, asserting that “neoliberals have bought and paid for their own vicious and regressive ‘Great Transformation’ … a huge international network of foundations … [that] develop, package and push their ideas and doctrine relentlessly.” In essence, since the 1960s, neoliberal thinkers have used their wealth to create institutions that tilt the ideological perspective of the world towards free market enterprise, a system which rewards the wealthy and penalizes the poor. Moreover, neoliberals have executed this ideological shift with such finesse that today neoliberalism appears to be, in the words of Susan George, “the natural and normal condition of humankind.”

One staunch supporter of neoliberalist ideology was Ronald Reagan, who served as president of the United States between 1981 and 1989. From 1977 to 1987, the difference in income between the top 1 percent of Americans and bottom 10 percent of Americans grew from 65 times as great to 115 times as great. This tremendous shift in income inequality may be attributed to the various neoliberalist policies Reagan enforced. These included sizable tax cuts which allowed affluent individuals to increase their wealth while removing money from government programs that could help poorer communities. Another way money moved from poor to wealthy communities was through lowering wages, which decreased the average income for low pay workers, while increasing the margins of profit for large scale investors and businessmen. Income inequality did not stop growing after Reagan’s reign — from 1979 to 2007 (18 years after Reagan left office) the incomes of the bottom 20 percent only rose 18 percent, while the incomes of the richest 1 percent rose 275 percent.

While it is clear that Reagan’s neoliberalist policies led to a significant increase in income inequality, some extrapolate this phenomenon even further and suggest that neoliberalism, and even capitalism itself, breed income inequality by nature. A recent book by Thomas Picketty argues that “worsening income inequality is an inevitable outcome of free market capitalism… the rise in inequality reflects markets working precisely as they should.” The key to Picketty’s argument is the fact that in a capitalist society, “entrepreneurs become increasingly dominant over those who only own their own labor.” Picketty’s theory highlights the fundamental reason that neoliberalism leads to income inequality — neoliberalist policies limit government regulation and allow business owners and investors to run their businesses in a manner that maximizes profit for themselves and their stakeholders, with no regard to their workers. This issue becomes more concerning when one realizes that neoliberalism is becoming the norm globally, and a world run by neoliberalism will most certainly be one of acute income inequality.

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