Inequality III: Is the Game Rigged?

 

The economist Joseph Stiglitz has an Op Ed column in today’s New York Times, “In No One We Trust”, blaming the financial crisis on the banking industry.  “In the years leading up to the crisis our traditional bankers changed drastically, aggressively branching out into other activities, including those historically associated with investment banking.  Trust went out the window. … When 1 percent of the population takes home more than 22 percent of the country’s income – and 95 percent of the increase in income in the post-crisis recovery – some pretty basic things are at stake. … Reasonable people can look at this absurd distribution and be pretty certain that the game is rigged. … I suspect that there is only one way to really get trust back.  We need to pass strong regulations, embodying norms of good behavior, and appoint bold regulators to enforce them.”  
CaptureMr. Stiglitz is partially correct.  Although the housing bubble, caused by poor government policy – loose money, subprime mortgages, and lax regulation – was the primary cause of the financial crisis, nevertheless, poorly regulated banking practices made the crisis much worse.  But this is all being fixed with Dodd-Frank, a just recently implemented Volker Rule, and a soon coming wind-down of Fannie Mae and Freddie Mac. 
Mr. Stiglitz concludes, “Without trust, there can be no harmony, nor can there be a strong economy.  Inequality is degrading our trust.  For our own sake, and for the sake of future generations, it is time to start rebuilding it. 
But how do we reduce the inequality in order to restore the trust which is necessary for a strong economy?  Mr. Stiglitz doesn’t say!
What we need is faster economic growth in order to create more new jobs.  The last four years have demonstrated that the Federal Reserve can’t accomplish this with quantitative easing.  It needs to be done by private business and entrepreneurship.  Tax reform and the easing of regulations on new businesses is what we need.  It’s too bad that ideological blinders prevent so many people from understanding this basic truth!    
    

More on Inequality: How Bad Is It and Why?

 

A recent article in Bloomberg View by Cass Sunstein, “How Did the 1 Percent Get Ahead So Fast?“, discusses the significance of new research by the economist Emmanuel Saez, ”Striking it Richer: The Evolution of Top Incomes in the United States”.  Referring to Saez’s table and chart below, the conclusion is that income inequality has been getting steadily worse since the early 1980s and has been especially pronounced since June 2009 when the Great Recession ended.
Capture1Capture2In particular, 95% of all income gain in the last four years has gone to the top 1%.  This is a much greater disparity than during the so-called Clinton Expansion, from 1993 – 2000 (45% to the top 1%) or during the Bush Expansion, from 2002 – 2007 (65% to the top 1%).  According to Mr. Sunstein, “one point is clear: through 2012 the gains from the current recovery were concentrated among the top 1 percent, and that pattern, extreme though it is, fits with a general surge in economic inequality over the last 40 years.”
CaptureBut there is more to the story!  Looking at the final chart, just above, it is clear that the economy grew much faster during the Clinton Expansion than during the Bush Expansion, and, in turn, much more slowly during the Obama Recovery.  In other words, the way to reduce inequality is to speed up economic growth.  There are tried and true ways to speed up growth (e.g. tax reform with lower rates, emphasis on deregulation, boosting entrepreneurship, etc.).  It is unfortunate that too many in Congress, as well as the President have ideological blinders which prevent them from moving in this direction!