Jonathan Rauch has an interesting piece in National Journal on inequality. He argues that a longstanding consensus among economists may be dissolving -- the idea that inequality is not really a problem in its own right, rather a symptom of other ills that are better confronted directly, like poverty, stagnant middle-class incomes, and excessive rewards for people working in finance. Rauch says that economists are coming round to the idea that inequality itself is a problem, not just in moral terms, but also because it directly leads to lower growth and greater macro instability. The channels he mentions are suppression of aggregate demand (because the rich save more than the poor), the credit cycle (because governments use easy loans as a palliative for middle-class anxieties about falling behind), and financial engineering (to feed the appetite of the rich for new financial products.
This changing view of inequality could be politically transformative, says Rauch:
The era when Washington economists and politicians could dismiss inequality as a second- or third-tier issue may be ending. And progressives, potentially, have a case against inequality that might put accusations of "class warfare" and "politics of envy" behind them.I'm a bit puzzled by the demand-shortfall argument, because lack of demand (under ordinary circumstances) is something monetary policy can deal with. The link via inequality between a destabilizing credit cycle (driven by pressure from below) and the pathological enlargement of the finance industry (driven by pressure from above) is more persuasive. I'm still skeptical, though, that solving either of those problems is made easier by melding them together. Doing that points you to a one-dimensional solution (much higher taxes on the rich) rather than something more effective but more complicated (better training and education; cuts in implicit subsidies to the finance industry; and somewhat higher taxes on the rich).
As for the politics, I'm pretty sure most progressives don't want to put "class warfare" behind them -- nor should they, in fact, provided they're clear about what they mean by "class." Joe Stiglitz's book, The Price of Inequality, which Rauch mentions, is clear that "class warfare" is an apt metaphor. This column by Stiglitz gives a synopsis of his argument.
It would be one thing if the high incomes of those at the top were the result of greater contributions to society, but the Great Recession showed otherwise: even bankers who had led the global economy, as well as their own firms, to the brink of ruin, received outsize bonuses.What's that, if not class warfare? And I'm fine with fighting it, as long as the class in the cross-hairs is precisely targeted: abusive monopolists, unchecked corporate chieftains, buyers and sellers of political influence, and assorted other rent-seekers. And as long as we understand that not everybody in the 1 percent, or 0.01 percent, is the enemy.
A closer look at those at the top reveals a disproportionate role for rent-seeking: some have obtained their wealth by exercising monopoly power; others are CEOs who have taken advantage of deficiencies in corporate governance to extract for themselves an excessive share of corporate earnings; and still others have used political connections to benefit from government munificence - either excessively high prices for what the government buys (drugs), or excessively low prices for what the government sells (mineral rights).
Likewise, part of the wealth of those in finance comes from exploiting the poor, through predatory lending and abusive credit-card practices. Those at the top, in such cases, are enriched at the direct expense of those at the bottom.
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