Could Income Inequality Become a Permanent Feature of the US?

Jeff Pelline reprinted (from Mother Jones) some interesting charts on income inequality over on his blog this morning. I was in the process of commenting there and had typed several paragraphs when I hit the wrong key and lost my whole effort. So, I’ve reworked my comments here:

Most of us, on the rare occasions when we think about it at all, consider income inequality to be a regrettable but probably unavoidable feature of an economic system which is fundamentally just and sound.

But there’s growing understanding among mainstream economists of the direct and terrible connection between inequality and economic meltdowns, the regular recurring boom and bust cycles like the one we are still trying to recover from now.

The mechanism is easy to understand: money (what should be demand) accumulates instead in the coffers of the rich (the hoarding class) and does not “trickle down.” If it did trickle down to the non-rich/non-hoarding classes, who have no choice but to spend it (on rent, mortgage, gas, food, etc, etc), it would then become demand, the engine for a healthy economy.

When inequality becomes extreme, the demand engine stalls. This is what happened on the eve of the Great Depression, and again on the eve of our current Great Recession.

Since the late 1970s — and particularly since the early 1980s when Reagan accelerated the war on the middle class and the war on unions by firing the air traffic controllers — worker real wages (adjusted for inflation) have stayed flat, and have not maintained their historic parity with growing productivity.

To make up for the decreasing demand from the now more impoverished middle class, some other demand mechanism had to be found. The other mechanism was easy credit, fueled by low interest rates engineered by Greenspan and his cronies at the Federal Reserve.

Americans began to use the still considerable equity in their homes as sources of borrowing. It appeared to be a “virtuous cycle” of growing values and growing debt. Americans used their homes like ATMs.

When the bubble burst — as all bubbles inevitably burst — in the late 1920s, the economy limped along for some years until jobs policies put in place by FDR (the “traitor to his class“) and his administration began to ameliorate the suffering somewhat. A setback occurred in 1939 when FDR, bowing to pressure from conservatives, attempted to balance the budget by reducing spending (sound familiar?). The real recovery finally took place as a result of the ultimate jobs program, World War II.

The point, though, is that, thanks to FDR, the political will existed at the federal level to address the root problem in some fashion.

I’m afraid that we face a much more dire situation today, with the potential for an Even Greater Depression.

Consider: Obama is no FDR, and shows little inclination to emulate him. He continues to rely for economic advice on the same cast of characters from the financial sector who created the current meltdown.

Instead of a Pecora Commission and a massive shaming and rebuke of Wall Street, we have historic profits and bonuses in the financial sector, combined with a continuing war on unions and on the increasingly-impoverished and rapidly-disappearing middle class.

At a time when the culprits should be facing jail terms, they continue to rule the roost.

The only way out of the current crisis is to “bail out” the working class with policies at the federal level, in order to restart the economy’s demand engine.

We need to raise taxes on the rich, the primary method for preventing hoarding. This is not as simple-minded as it sounds. See “Weird Tax Myths.”

Unfortunately, though, the deficit hawk mentality prevails in Washington today.

The only sign of hope anywhere in our country is in the massive public reaction, starting in Wisconsin, to the latest assault on unions.

Either the union movement will recover some of its historic strength in the current conflict, or it may die once and for all.

If it dies, God help us all.

We’ll be living in a world of permanent income inequality.

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