Have a look at this article if you haven't already: Tyler Cowen on The Inequality That Matters. It is really two essays in one, bringing together discussions on inequality and modern finance that have been mostly separate up to now. I agree with Cowen that this was an error: they need to be merged. Growing inequality is a narrower (and less politically salient) issue than is usually argued, he says, mostly confined to the financial sector and a sliver of the super-rich. Where it is a problem, it is a symptom of something worse than inequality in its own right--something deep and hard to control.
For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It's no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind.
He is at a loss for remedies. No more bail-outs? Try making that stick. Closer supervision? That's naive and impractical, he says. Even higher capital requirements could have the unintended consequence of insulating managers from creditors and shareholders, thus encouraging risk-taking rather than suppressing it. He doesn't discuss taxes...
Is the overall picture a shame? Yes. Is it distorting resource distribution and productivity in the meantime? Yes. Will it again bring our economy to its knees? Probably. Maybe that's simply the price of modern society. Income inequality will likely continue to rise and we will search in vain for the appropriate political remedies for our underlying problems.
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