The Economy Cannot Recover As Long As Inequality Continues to Skyrocket ... But Government Policy Is INCREASING Inequality

George Washington's picture

Washington’s Blog


The Economist noted in January:

Jintao, David Cameron, Warren Buffett and Dominique Strauss-Kahn ...
have all worried, loudly and publicly, about the dangers of a rising
gap between the rich and the rest.


A new survey by the
World Economic Forum, whose annual gathering of bigwigs in Davos
begins on January 26th, says its members see widening economic
disparities as one of the two main global risks over the next decade
(alongside failings in global governance).

prominent economists in government and academia have all said that
large inequalities can cause - or at least contribute to - financial
crises, including:

Add Alan Greenspan to the list, who says:

problem basically is that we have a very distorted economy, in the
sense that there has been a significant recovery in our limited area of
the economy amongst high-income individuals...


Large banks,
who are doing much better and large corporations, whom you point out
and everyone is pointing out, are in excellent shape. The rest of the
economy, small business, small banks, and a very significant amount of
the labour force, which is in tragic unemployment, long-term
unemployment - that is pulling the economy apart. The average of those
two is what we are looking at - that they are fundamentally two
separate types of economies.

And several IMF economists. As Bnet wrote in May:

research [shows] that high income inequality may actually hurt
long-term economic growth. Two economists at the International Monetary
Fund, Andrew G. Berg and Jonathan D. Ostry, released a paper
in April that concludes that countries with high inequality are more
likely to have shorter spells of positive growth compared to countries
with less inequality. That’s another way of saying that high
inequality hurts the economy.


Instead of looking purely at the
relationship between inequality and growth, Berg and Ostry examined
the relationship between inequality and the duration of
periods of positive growth. They measure a growth spell as a period of
sustained growth and estimate the effect of inequality and other
factors on how long growth spells last.


Their model included a
variety of factors that economics have previously found to affect
economic growth, such as external shocks, the initial income of the
country (ie., did it start out very poor or wealthy?), the
institutional make-up of the country, its openness to trade, and its
macroeconomic stability.


The finding: Only income inequality stood out “as a key driver of the duration of growth spells.”


The [economists] concluded with the following:

main results in this note are that (i) increasing the length of
growth spells, rather than just getting growth going, is critical to
achieving income gains over the long term; and (ii) countries with more
equal income distributions tend to have significantly longer growth
spells. …. growth and inequality-reducing policies are likely to
reinforce one another and help to establish the foundations for a
sustainable expansion.”

economics professors Saez (UC Berkeley) and Piketty (Paris School of
Economics) show that the percentage of wealth held by the richest 1% of
Americans peaked in 1928 and 2007 - right before each crash:

Figure 1

The Washington Post's Ezra Klein wrote in June:

Thumbnail image for inequalitygraph.jpg



says that he used to dismiss talk that inequality contributed to
crises, but then we reached Great Depression-era levels of inequality
in 2007 and promptly had a crisis, so now he takes it a bit more

The problem, he says, is finding a mechanism.
Krugman brings up underconsumption (wherein the working class borrows a
lot of money because all the money is going to the rich) and
overconsumption (in which the rich spend and that makes the next-most
rich spend and so on, until everyone is spending too much to keep up
with rich people whose incomes are growing much faster than everyone

(The graphics above are slightly misleading, as Saez notes that inequality is actually worse now than it's been since 1917.)

Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes:

the rich spend a smaller proportion of their wealth than the
less-affluent, and so when more and more wealth becomes concentrated in
the hands of the wealth, there is less overall spending and less
overall manufacturing to meet consumer needs.


Second, in both
the Roaring 20s and 2000-2007 period, the middle class incurred a lot
of debt to pay for the things they wanted, as their real wages were
stagnating and they were getting a smaller and smaller piece of the pie.
In other words, they had less and less wealth, and so they borrowed
more and more to make up the difference. As Reich notes:

1913 and 1928, the ratio of private credit to the total national
economy nearly doubled. Total mortgage debt was almost three times
higher in 1929 than in 1920. Eventually, in 1929, as in 2008, there were
“no more poker chips to be loaned on credit,” in [former Fed chairman
Mariner] Eccles' words. And “when their credit ran out, the game

And third, since the wealthy accumulated more,
they wanted to invest more, so a lot of money poured into speculative
investments, leading to huge bubbles, which eventually burst. Reich
points out:

In the 1920s, richer Americans created stock and
real estate bubbles that foreshadowed those of the late 1990s and
2000s. The Dow Jones Stock Index ballooned from 63.9 in mid-1921 to a
peak of 381.2 eight years later, before it plunged. There was also
frantic speculation in land. The Florida real estate boom lured
thousands of investors into the Everglades, from where many never
returned, at least financially.

Wall Street cheered them on in the 1920s, almost exactly as it did in the 2000s.

I am convinced that a fourth causal
connection between inequality and crashes is political. Specifically,
when enough wealth gets concentrated in a few hands, it becomes easy
for the wealthiest to buy off the politicians,
to repeal regulations, and to directly or indirectly bribe regulators
to look the other way when banks were speculating with depositors
money, selling Ponzi schemes or doing other shady things which end up undermining the financial system and the economy.

As John Kenneth Galbraith noted in The Great Crash, 1929,
Laissez-faire deregulation was the order of the day under the
Coolidge and Hoover administrations, and the possibility of a
financial meltdown had never been seriously contemplated. Professor
Irving Fisher of Yale University - the Alan Greenspan, Robert Rubin or
Larry Summers of his day - had stated authoritatively in 1928 that
"nothing resembling a crash can occur".

Indeed, when enough money
is concentrated in a couple of hands, the affluent can lobby to
appoint to government positions, pay to endow prominent university
chairs, and create think tanks and other opportunities for economics
professors who spout the dogmas "everything will always remain stable
because we've got if figured out this time" and "don't worry about
fraud" to gain prominence. For example, Bill Black has written about The Olin Foundation's promotion over the last couple of decades of these dogmas.

As Joseph Stiglitz says:

big part of the reason we have so much inequality is that the top 1
percent want it that way. The most obvious example involves tax policy.
Lowering tax rates on capital gains, which is how the rich receive a
large portion of their income, has given the wealthiest Americans close
to a free ride. Monopolies and near monopolies have always been a
source of economic power—from John D. Rockefeller at the beginning of
the last century to Bill Gates at the end. Lax enforcement of
anti-trust laws, especially during Republican administrations, has been
a godsend to the top 1 percent. Much of today’s inequality is due to
manipulation of the financial system, enabled by changes in the rules
that have been bought and paid for by the financial industry itself—one
of its best investments ever. The government lent money to financial
institutions at close to 0 percent interest and provided generous
bailouts on favorable terms when all else failed. Regulators turned a
blind eye to a lack of transparency and to conflicts of interest.


begets power, which begets more wealth .... Virtually all U.S.
senators, and most of the representatives in the House, are members of
the top 1 percent when they arrive, are kept in office by money from
the top 1 percent, and know that if they serve the top 1 percent well
they will be rewarded by the top 1 percent when they leave office. By
and large, the key executive-branch policymakers on trade and economic
policy also come from the top 1 percent. When pharmaceutical companies
receive a trillion-dollar gift—through legislation prohibiting the
government, the largest buyer of drugs, from bargaining over price—it
should not come as cause for wonder. It should not make jaws drop that a
tax bill cannot emerge from Congress unless big tax cuts are put in
place for the wealthy. Given the power of the top 1 percent, this is
the way you would expect the system to work.

(Congress is also exempt from insider trading laws.)

fourth factor exacerbates the first three. Specifically, when the
wealthy have enough money to drown out other voices who might otherwise
be heeded by legislators and regulators, they can:

  • Skew the tax code and other laws so that they can get even wealthier
  • Encourage
    a debt bubble (Bill Black has repeatedly explained that the fraudsters
    blow huge bubbles, knowing that the government will bail them out when
    the bust leads to defaults)
  • Create new Ponzi schemes for speculation

(Admittedly, there might not always be a direct connection, but all of the factors are at least intertwined.)

Reuters discussed Reich's first three factors last year:

are only beginning to study the parallels between the 1920s and the
most recent decade to try to understand why both periods ended in
financial disaster. Their early findings suggest inequality may not
directly cause crises, but it can be a contributing factor.




is little agreement among economists about what precisely links high
inequality to crises, which helps explain why so few officials saw the
financial upheaval coming.


Rapid expansion of credit is one common thread.




Rajan, a professor at the University of Chicago's Booth School of
Business and a former chief economist of the International Monetary
Fund, believes governments tend to promote easy credit when inequality
spikes to assuage middle-class anger about falling behind.


"One way to paper over the rising inequality was to lend so that people could spend," Rajan said.


the 1920s, it was expansion of farm credit, installment loans and
home mortgages. In the last decade, it was leveraged borrowing and
lending, by home buyers who put no money down or investment banks that
lent out $30 for each $1 held.


"Housing credit gave you an
instrument to assist those falling behind without them feeling they're
beneficiaries of some sort of subsidy," Rajan said. "Even if their
incomes are stagnant, they feel really good about becoming

Another theory is that concentration of wealth at
the top sends investors searching for riskier interest-bearing
savings. When so much cash is sloshing around, traditional safe
investments such as Treasury debt yield very little, and wealthy
investors may seek out fatter returns elsewhere.

Mark Thoma,
who teaches economics at the University of Oregon, wonders if the
flood of investment cash from the ultra-rich -- both in the United
States and abroad -- encouraged Wall Street to create seemingly safe
mortgage-backed securities that later proved disastrously risky.


"When we see income inequality rising, we ought to start looking for bubbles," he said.


Dervis, global economy and development division director at Brookings
and a former economy minister for Turkey, said reducing inequality
isn't just a matter of fairness or morality. An economy based on
consumption needs consumers, and if too much wealth is concentrated at
the top there may be times when there is not enough demand to support


"There may be demand for private jets and yachts, but
you need a healthy middle-income group (to drive consumption of basic
goods)," he said. "In the golden age of capitalism, in the 1950s and
60s, everyone shared in income growth."


The fact that economists
are even examining the link between inequality and financial crises
shows just how much the thinking has changed in the wake of the Great




Ajay Kapur, a Deutsche Bank strategist, spotted the
inequality parallels between the 1920s and the most recent decade, but
didn't see the meltdown coming. The former Citigroup strategist
created a stir five years ago when he built an investment strategy
around his thesis that essentially divided the world into two camps:
the rich and the rest.


Kapur told clients in 2005 that the
United States and a handful of other economies were developing into
"plutonomies" where the wealthy few powered economic growth and
consumed much of its bounty, while the "multitudinous many" shared the


Plutonomies come around only once or twice a
century, he argued -- 16th century Spain, 17th century Holland, the
Gilded Age. The last time it happened in the United States was during
the "Roaring 1920s".




At least one new arrival to
Washington's policy-making scene, Fed Vice Chairman


Janet Yellen, has
expressed concern that extreme inequality could ultimately undermine
American democracy.

"Inequality has risen to the point that it
seems to me worthwhile for the U.S. to seriously consider taking the
risk of making our economy more rewarding for more of the people," she
wrote in a 2006 speech.

No One Likes Inequality

The father of modern economics - Adam Smith - didn't believe
that inequality should be a taboo subject. As Warren Buffet, one of
America's most successful capitalists and defenders of capitalism, points out:

There's class warfare, all right, but it's my class, the rich class, that's making war ....

Conservatives - as well as liberals - are against rampant inequality. If Americans understood how much inequality we have, they would be outraged.

For example, Dan Ariely of Duke University and Michael I. Norton of Harvard Business School demonstrate that Americans consistently underestimate the amount of inequality in our nation. As William Alden wrote last September:

vastly underestimate the degree of wealth inequality in America, and
we believe that the distribution should be far more equitable than
it actually is, according to a new study.


Or, as the study's
authors put it: "All demographic groups -- even those not usually
associated with wealth redistribution such as Republicans and the
wealthy -- desired a more equal distribution of wealth than the status


The report ... "Building a Better America -- One Wealth
Quintile At A Time" by Dan Ariely of Duke University and Michael I.
Norton of Harvard Business School ... shows that across ideological,
economic and gender groups, Americans thought the richest 20 percent of our society controlled about 59 percent of the wealth, while the real number is closer to 84 percent.

Worse Than Third World Banana Republics

Inequality in the United States is at insane levels. Inequality among Americas is worse than in Egypt, Tunisia or Yemen. As NPR notes, inequality is higher in America than in many Latin America banana republics. And social mobility is lower in America than in most European countries (and see this, this and this).

Inequality between Wall Street and Main Street harms the economy. For example, Steve Keen notes
that "a sustainable level of bank profits appears to be about 1% of
GDP", and higher bank profits lead to a Ponzi economy and a

Moreover, as the Atlantic points out, inequality is fracturing the nation geographically as well:

stories about inequality in America miss an important point: rising
disparities are not just about investment bankers versus auto workers.
They’re about entire communities of “winners” and “losers.” And as
these communities continue to diverge, the idea of “an American
economy” looks more and more like an anachronism.

Economics professor Robert Frank noted last year:


In a recent working paper
based on census data for the 100 most populous counties in the United
States, Adam Seth Levine (a postdoctoral researcher in political
science at Vanderbilt University),
Oege Dijk (an economics Ph.D. student at the European University
Institute) and I found that the counties where income inequality grew
fastest also showed the biggest increases in symptoms of financial


example, even after controlling for other factors, these counties had
the largest increases in bankruptcy filings.


Divorce rates are another reliable indicator of
financial distress, as marriage counselors report that a high proportion
of couples they see are experiencing significant financial problems.
The counties with the biggest increases in inequality also reported the
largest increases in divorce rates.


Another footprint of financial distress is long
commute times, because families who are short on cash often try to make
ends meet by moving to where housing is cheaper — in many cases,
farther from work. The counties where long commute times had grown the
most were again those with the largest increases in inequality.


And as WBUR reports:

British epidemiologists say inequality is a public health issue, a
national health issue. From crime rates to drug use to teenage
pregnancy to heart disease and more, they say, the evidence shows
inequality makes countries sick, even the rich.

Government Policy Is Increasing Inequality

The New York Times notes:


at Northeastern University have found that the current economic
recovery in the United States has been unusually skewed in favor of
corporate profits and against increased wages for workers.

their newly released study, the Northeastern economists found that
since the recovery began in June 2009 following a deep 18-month
recession, “corporate profits captured 88 percent of the growth in real
national income while aggregate wages and salaries accounted for only
slightly more than 1 percent” of that growth.

The study, “The ‘Jobless and Wageless Recovery’ From the Great Recession of 2007-2009,” said it was “unprecedented” for American workers to receive such a tiny share of national income growth during a recovery.



share of income growth going to employee compensation was far lower
than in the four other economic recoveries that have occurred over the
last three decades, the study found.

Robert Reich has noted:

cheerleaders say rising stock prices make consumers feel wealthier
and therefore readier to spend. But to the extent most Americans have
any assets at all their net worth is mostly in their homes, and those
homes are still worth less than they were in 2007. The "wealth effect"
is relevant mainly to the richest 10 percent of Americans, most of
whose net worth is in stocks and bonds.

AP writes:

The recovery has been the weakest and most lopsided of any since the 1930s.

previous recessions, people in all income groups tended to benefit.
This time, ordinary Americans are struggling with job insecurity, too
much debt and pay raises that haven't kept up with prices at the
grocery store and gas station. The economy's meager gains are going
mostly to the wealthiest.

Workers' wages and benefits make up
57.5 percent of the economy, an all-time low. Until the mid-2000s, that
figure had been remarkably stable -- about 64 percent through boom and
bust alike.

David Rosenberg points out:

"labor share of national income has fallen to its lower level in modern
history ... some recovery it has been - a recovery in which labor's
share of the spoils has declined to unprecedented levels."

The above-quoted AP article further notes:

market gains go disproportionately to the wealthiest 10 percent of
Americans, who own more than 80 percent of outstanding stock, according
to an analysis by Edward Wolff, an economist at Bard College.

Indeed, as I reported last year:

As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.


(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)

Professor G. William Domhoff demonstrated that the richest 10% own 98.5% of all financial securities, and that:

top 10% have 80% to 90% of stocks, bonds, trust funds, and business
equity, and over 75% of non-home real estate. Since financial wealth
is what counts as far as the control of income-producing assets, we
can say that just 10% of the people own the United States of

The New York Times notes:

median pay for top executives at 200 big companies last year was
$10.8 million. That works out to a 23 percent gain from 2009.




Most ordinary Americans aren’t getting raises anywhere close to those
of these chief executives. Many aren’t getting raises at all — or even
regular paychecks. Unemployment is still stuck at more than 9




“What is of more concern to shareholders
is that it looks like C.E.O. pay is recovering faster than company
fortunes,” says Paul Hodgson, chief communications officer for
GovernanceMetrics International, a ratings and research firm.


According to a report released by GovernanceMetrics
in June, the good times for chief executives just keep getting
better. Many executives received stock options that were granted in
2008 and 2009, when the stock market was sinking.

that the market has recovered from its lows of the financial crisis,
many executives are sitting on windfall profits, at least on paper. In
addition, cash bonuses for the highest-paid C.E.O.’s are at three
times prerecession levels, the report said.



average American worker was taking home $752 a week in late 2010, up a
mere 0.5 percent from a year earlier. After inflation, workers were
actually making less.

AP points out that the average worker is not doing so well:

Unemployment has never been so high -- 9.1 percent -- this long after
any recession since World War II. At the same point after the previous
three recessions, unemployment averaged just 6.8 percent.

-- The
average worker's hourly wages, after accounting for inflation, were
1.6 percent lower in May than a year earlier. Rising gasoline and food
prices have devoured any pay raises for most Americans.

-- The
jobs that are being created pay less than the ones that vanished in the
recession. Higher-paying jobs in the private sector, the ones that pay
roughly $19 to $31 an hour, made up 40 percent of the jobs lost from
January 2008 to February 2010 but only 27 percent of the jobs created
since then.

Part of the widening gap is due to the fact that most American companies' profits are driven by foreign sales and foreign workers. As AP noted last year:

Corporate profits are up. Stock prices are up. So why isn't anyone hiring?

many American companies are — just maybe not in your town. They're
hiring overseas, where sales are surging and the pipeline of orders is




The trend
helps explain why unemployment remains high in the United States,
edging up to 9.8% last month, even though companies are performing
well: All but 4% of the top 500 U.S. corporations reported profits this
year, and the stock market is close to its highest point since the
2008 financial meltdown.

But the jobs are
going elsewhere. The Economic Policy Institute, a Washington think
tank, says American companies have created 1.4 million jobs overseas
this year, compared with less than 1 million in the U.S. The
additional 1.4 million jobs would have lowered the U.S. unemployment
rate to 8.9%, says Robert Scott, the institute's senior international

"There's a huge difference
between what is good for American companies versus what is good for
the American economy," says Scott.


Many of the products
being made overseas aren't coming back to the United States. Demand
has grown dramatically this year in emerging markets like India, China
and Brazil.

Government policy has accelerated the growing inequality. It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate ... that is, not only do they pay no taxes, but they actually get tax refunds.

As mentioned above, a rising stock market mainly benefits the wealthy. And yet the Federal Reserve has more or less admitted that it is putting tremendous effort and resources into boosting the stock market.

easing doesn't help Main Street or the average American. It only
helps big banks, giant corporations, and big investors. See this and this. And by causing food and gas prices skyrocket, it takes a bigger bite out of the little guy's paycheck, and thus makes the poor even poorer.

As I noted in March 2009:

bailout money is just going to line the pockets of the wealthy,
instead of helping to stabilize the economy or even the companies
receiving the bailouts:

  • A lot of the bailout money is going to the failing companies' shareholders
  • Indeed, a leading progressive economist says that the
    true purpose of the bank rescue plans is "a massive redistribution
    of wealth to the bank shareholders and their top executives"
  • The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws
    which rewards mergers in the banking industry (this has caused a lot
    of companies to bite off more than they can chew, destabilizing the
    acquiring companies)

The Fed has given trillions to the biggest banks, and virtually nothing to main street. This has gone to Wall Street bonuses and made the big banks' executives richer, but the rest of us poorer (and it hasn't help the economy).

As I wrote in 2008:

game of capitalism only continues as long as everyone has some money
to play with. If the government and corporations take everyone's
money, the game ends.

The fed and Treasury are not
giving more chips to those who need them: the American consumer.
Instead, they are giving chips to the 800-pound gorillas at the poker
table, such as Wall Street investment banks. Indeed, a good chunk of
the money used by surviving mammoth players to buy the failing behemoths
actually comes from the Fed.

And Tyler Durden notes today, summarizing many of the above-described trends:

today's edition of Bloomberg Brief, the firm's economist Richard
Yamarone looks at one of the more unpleasant consequences of Federal
monetary policy: the increasing schism in wealth distribution between
the wealthiest percentile and everyone else. ... "To the extent that
Federal Reserve policy is driving equity prices higher, it is also
likely widening the gap between the haves and the have-nots....The disparity between the net worth of those on the top rung of the income ladder and those on lower rungs has been growing. According to the latest data from the Federal Reserve’s Survey of Consumer Finances, the total wealth of the top 10 percent income bracket is larger in 2009 than it was in 1995. Those further down have on average barely made any gains. It
is likely that data for 2010 and 2011 will reveal an even higher
percentage going to the top earners, given recent increases in stocks
Alas, this is nothing new, and merely confirms speculation that the
Fed is arguably the most efficient wealth redistibution, or rather
focusing, mechanism available to the status quo. This is best summarized
in the chart below comparing net worth by income distribution for
various percentiles among the population, based on the Fed's own data.
In short: the richest 20% have gotten richer in the past 14 years,
entirely at the expense of everyone else.


Lastly, nowhere is the schism more evident, at least in market terms, than in the performance of retail stocks:

chairman Steve Sadove recently remarked, “I’ve been saying for several
years now the single biggest determinant of our business overall, is
how’s the stock market doing.” Privately-owned Neiman- Marcus reported
“In New York City, business at Bergdorf Goodman continues to be
extremely strong.”

In contrast, retail giant Wal-Mart talks of
its “busiest hours” coming at midnight when food stamps are activated
and consumers proceed through the check-outs lines with baby formula,
diapers, and other groceries. Wal-Mart has posted a decline in
same-store sales for eight consecutive quarters.

(Indeed, as CNN Money pointed out in March, "Wal-Mart's core shoppers are running out of money much faster than a year ago ...")

Durden also notes:

indication of the increasing polarity of US society is the disparity
among consumer confidence cohorts by income as shown below, and
summarized as follows: "The increase in equity prices has raised
consumer spirits, particularly among higher-income consumers. The
Conference Board’s Consumer Confidence index for all income levels
bottomed in February/March of 2009. The recovery since then has been
notable across the board, but nowhere as much as for those making
$50,000 or more."


Indeed, that could be a fifth factor
(adding to Reich's third factor and the fourth factor of political
corruption): inequality dampens the confidence of most consumers.

The bottom line is that government policy is increasing inequality by helping the big boys and hurting just about everyone else.

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BigJim's picture

Yes, having the government bail out the richest 1% when they fuck up, and transfer the cost to other taxpayers and currency holders, is obviously going to perpetuate wealth inequality.

But it seems to me that all the hand-wringing about these inequality statistics ignores the fact that the stats are not age-adjusted.

You would expect a 25 year old to be massively more wealthy than a 15 year old, a 35 year old to be more wealthy than a 25 year old, etc. This would peak somewhere around retirement, and if the retirees invested well - so that their principle expanded greater than their outgoings - they'd continue getting richer until death. Obviously then, increased longevity is going to increase wealth inequality statistics.

So let's see some age-adjusted statistics (as well as the end of TBTF, and the enforced penury of those who got bailed out)

aerial view's picture

The laws unjustly favor large corporations at the expense of small businesses. If there were no Walmarts, McDonalds, Home Depots, etc, unemployment would not exist, tax base would be much larger and wealth would be more evenly distributed. When I lived in a small town that allowed a Walmart to come in, no less than 20 small businesses went under.

steelhead23's picture

I would like to commend both Mr. Washington and Mr. Durden for presenting this fine piece.  I hope folks don't take the wrong message from the thesis that income inequality undermines economic growth and stability.  The issue is not so much "taking from the rich" in the form of increasing taxes, rather the issue is about increasing wages from labor, which has more to do with trade policy than tax policy and much more to do with boosting labor power than boosting the welfare state.  Indeed, I believe the entire fiscal problem is being pursued stupidly.  Rather than trying to balance the federal budget by cutting spending and increasing taxes, the focus should be on putting slack productivity to work - increasing wages would increase federal revenues without increasing tax rates and would decrease the need for unemployment compensation, food stamps, etc. 

AnAnonymous's picture

The issue is not so much "taking from the rich" in the form of increasing taxes, rather the issue is about increasing wages from labor,


But that is taking from profits... So the same.

rex-lacrymarum's picture

The biggest reason for the growth in the GINI coefficient is the fiat money system and the policy of inflation associated with it - as recounted here (link below)  in a critique of a recent Sarah Bloom Raskin speech. It is quite extraordinary to see a person who's working for the institution that bears the highest responsibility for growing wealth inequality to complain about it (and of course, demand even more intrusive government regulations to 'fix' it).

steelhead23's picture

I would like to commend both Mr. Washington and Mr. Durden for presenting this fine piece.  I hope folks don't take the wrong message from the thesis that income inequality undermines economic growth and stability.  The issue is not so much "taking from the rich" in the form of increasing taxes, rather the issue is about increasing wages from labor, which has more to do with trade policy than tax policy and much more to do with boosting labor power than boosting the welfare state.  Indeed, I believe the entire fiscal problem is being pursued stupidly.  Rather than trying to balance the federal budget by cutting spending and increasing taxes, the focus should be on putting slack productivity to work - increasing wages would increase federal revenues without increasing tax rates and would decrease the need for unemployment compensation, food stamps, etc. 

dexter_morgan's picture

"The bottom line is that government policy is increasing inequality by helping the big boys and hurting just about everyone else."

By George, I think you've got it.

Bartanist's picture

IMO it has nothing to do with equality, however it has everything to do with fairness and equal protection under the law.

I am a proponent of fair, not equal. The system we have now is not "fair".

dexter_morgan's picture

+++  seems obvious, but apparently it is not

FMR Bankster's picture

History shows income inequality is only reduced during depressions and World Wars. It won't happen but we could slow the process some by raising the taxes on capital gains and dividends (why the hell should THAT income be taxed at a lower rate)and end corporate tax breaks that distort the economy towards finance capital. End the deduction for interest expense and LBO's end overnight. (along with the layoffs)Basically do away with ALL corporate tax breaks and drop rates towards those prevelent in other countries. Never happen of course since liberals love their green energy dreams (illusions)just as much as the right loves drill baby drill tax breaks for fossil fuels.

Clowns on Acid's picture

As soon as Robert Reich, NY Times, and DSK were mentioned the article lost credibility.

Reptil's picture

FWIW I think not, it didn't. The article pointed out that what these men said is different from what they do.

This isn't helping either: Prison inmates to take lower wage jobs. SLAVE LABOUR? Unemployment ratios? WTF?

geno-econ's picture

In the end it does not matter ---except that the wealthy have bigger tombstones and their children enjoy life more for a while longer until their wealth dissipates and they too have smaller tombstones.  Throughout history humans have always pitted the haves and have nots against each other with tragic results. The real losers are the pretenders who become pawns of the wealthy. 

Sambo's picture

As long as people are willing to take paycuts or tiny pay raises, while the proverbial Sword of Democles hangs over them, the corporate world will continue to force unemployment higher, force the hands of the govt towards increasing handouts (unemployment benefits, medical cost write offs, home loan write offs, college loan write offs etc) at the expense of the tax payer.

For majority of the folks, there is no recovery and there will not be one in the foreseeable future.

This can change if a black swan event happens... like when slave workers all decide to show the 10% rich class the finger one day.


bigkahuna's picture

The key is debt. To resolve the inequity, we have to  get out of debt. To ALL of us as a collective: WE GOT IN, WE GET OUT. To each person as an individual: YOU GOT IN, YOU GET OUT. It is really that FREAKIN' simple people!!! Now lets take responsibility and drive it home! 

LawsofPhysics's picture

This cycle of greed has been played out over and over throughout history (It really is a monopoly game after all).  The moral hazard has been unleashed and until fraud, at all levels, is prosecuted you will see more and more people disconnecting from the system until the system fails.  All one can do is prepare and hedge accordingly.

praps's picture

The rich own most everything and are buying the rest. Ever played Monopoly?

The rich need to be taxed more to redistribute the wealth and to stop them buying up more and more. They need to be forced to sell a few assets back to the middle class.

MachoMan's picture

Taxation of income can be manipulated easily...  capital flight...  numerous issues...  however, what you are really advocating, practically speaking (given you desire to actually collect wealth) is confiscation.  Just cut to the chase.

Further, should you seek confiscation, you have a limited window to perform it, given it will be: (a) more and more apparent and (b) incrementally implemented.  Confiscation will come as default...  but will also come as confiscation...

Mercury's picture

I'm not saying wide income inequality isn't now and can never be a problem but importing near destitute immigrants exacerbates this situation.

If the income of every American who has been in this country a year or longer doubles from 2011 to 2012 (a good thing), the income inequality gap would be that much wider than it was a year earlier as a new crop of very poor immigrants would be holding down the left side of the scale.

Maybe I'm missing something here and I'm using an exaggerated example to make a point but I don't see how this can not be the case.

Bicycle Repairman's picture

"Part of the widening gap is due to the fact that most American companies' profits are driven by foreign sales and foreign workers."

This is the end game.  America's middle class is tapped out and has outmoded skills.  They have been discarded as producers and consumers.  There will not be any plan to rectify either problem.  Hope everyone likes bread and circuses.

Capitalist10's picture

Part of the widening gap is two generations of Americans who have been educated in lousy schools to have lots of self esteem but little in the way of motivation, discipline or skills.  Thanks to the teachers unions, their skills are "outmoded" the day they leave school.

Rising inequality reflects the spltting of America into a shrinking productive class and an expanding moocher class.

pitz's picture

So why aren't the scientists and engineers that *do* have the skills, earning a million bucks a year?  After all, they're scarce, according to you.

Only 1/3rd of the engineering and science graduates from top US ivy league institutions are able to find employment, and this has been the situation for much of the past decade. 

Hardly indicative of an economy that is in need of skilled workers, when those who do have skills aren't highly cherished, but are rather treated worse than dog shit.

LawsofPhysics's picture

Remind me, exactly what do the bankers and financial fucknuts "produce" again?  They are the only ones that I see making large sums of money, aside from energy companies.  I think you have a very fucked up idea of exactly what being "productive" is.  Pushing paper creates nothing of real value (i.e. non-productive), especially once the "mark to myth" accounting is ended.

Capitalist10's picture

I don't necessarily disagree with you about financial types, but look around you:

I see a few folks who bucked the trend - everything from good mechanics to engineers, programmers, entrepreneurs and small businesspeople.  But mostly I see folks with no more skills or ambition than racking up a high score in the latest video game and sucking off the government tit.

Sambo's picture

I think there has been a major disruption in consciousness. As humans we are becoming immature...haven't you noticed? Adults are behaving more like children now, aided in their slide to immaturity by the cell phone / video game / facebook culture.


piceridu's picture

+++++ I'm long infantilism.

Capitalist10's picture

That's what I'm talking about.  But it is not all humans.  I see lots of ambitious and hard working Asians, Brazilians and Eastern Europeans.  Americans and Western Europeans, not so much.

It is not just the facebook culture, but the neverending expansion of the welfare state that is turning Westerners into dependent children.  Look at Greece for an extreme example.

MachoMan's picture

The nanny state is designed to create ninnies...  Does a dump site develop bears who are lean, mean hunting machines?

DaveyJones's picture

good analogy. Nature is also the oldest most perfected check and balance competition system that forces the player to adapt, work hard and plan. The cheater can never run the system, something takes them out.

BeansBulletsBandaids's picture

Nice bear analogy. I'll definitely use that one.

ebworthen's picture


There is thought, there is politics, there is ethics.

Thinkers who are politicians without ethics are natural.

Politicians without ethics occasionally have an intelligent thought.

Ethical politicians of intelligence are rare.


snakehead's picture

"The economy" is doing just fine for the klepto class.

tinylittleguy's picture
In a Bill, Wall Street Shows Its Clout

By Andrew Ross Sorkin

Wall Street often tries to play down its influence in Washington. As Congress pushed through financial regulations that seemed to get watered down last year, Wall Street’s chief executives tried to suggest, somewhat surprisingly, that their highly paid lobbyists did not have much sway.

If there is still any question about how much power Wall Street actually has in Washington, here is some fresh evidence worth examining.

In a piece of legislation recently passed by the House and the Senate to revamp patent law, a tiny provision was inserted at the last minute called Section 18.

The provision, which my colleague Edward Wyatt detailed in an article ahead of the House’s vote on the bill last month, has only one purpose: to allow the banking industry to skirt paying for certain important patents involving “business methods.”

The provision even allows “retroactive reviews of approved business method patents, allowing the financial services industry to challenge patents that have already been found valid both at the U.S. Patent and Trade Office and in Federal Court,” according to Representative Aaron Schock, an Illinois Republican who tried to strike the provision.

The legislation was initially introduced by Senator Charles E. Schumer, a New York Democrat, with an even narrower view: to protect the interests of his big bank constituents in a dispute with DataTreasury Corporation of Plano, Tex., a company that owns dozens of patents for processing digital copies of checks.

Wall Street fought for the bill because it says it has been held hostage by holders of “business method” patents that should never have been granted by the patent office in the first place. Banks like JPMorgan Chase have been fighting DataTreasury over its patents for years.

The language in the bill is expansive. It covers patents for “a financial product or service” as well as “corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service.”..................... read more

equity_momo's picture

Dont be spamming Andrew Fucking Sorkin's feces on ZH. The guy is a fully-fledged ass-licker of Wall St. If he ever says anything negative about the St you can bet its because he has been advized to , by the St.

NotApplicable's picture

Hey, it's still good to know.

Too bad that DC can't put together the logic that if business process patents are bad for the financial industry, they are bad for all others as well. Are there any worse barriers to entry?

ebworthen's picture


Hangings, and an axe to the machines.


Kreditanstalt's picture

Well, there are two kinds of critics of today's economic mess.

a)those who think that government should play referee, should regulate to prevent "unfairness", that the masses should use their governments to "tax the rich" because having more money is "unfair" or "unequal"...that "the banksters" "stole the people's money" and that, if "the money" was just returned, an the criminals punished, we could all go back to peace & prosperity forever, just like 1985...or 2005.  See: Paul Craig Roberts, Paul Krugman, Karl Denninger, Lou Dobbs, Ezra Klein, Charles Hugh Smith, or Matt Taibbi.

b)those who think that socialism has had its time and that we should give anarcho-capitalism a chance.  Inequality is an unavoidable (and necessary) fact of capitalist life and SOCIAL ENGINEERING NEVER WORKS.  That the socialist Fed and the fiat money system are the roots of the problems, that "the wealth" locked up in real estate never existed, that it is impossible for everyone to get rich in a Ponzi...that LESS regulation and more self-reliance is the answer...see Doug Casey, Lew Rockwell, Bill Bonner, or any number of other libertarian bloggers.

Pick your reality...

AnAnonymous's picture

Pick your reality?

In the classical US propagandist motto, it means "pick up your lie. And join your forces with me to defend it against the attacks of other propragandists and comfort it against the existence of facts."



And another US citizen who is convinced he deserves every single cent he makes.

I wonder if propagandists fully realize how cheap their propaganda is.

The US has a story of successful social engineering. The FF detailed their recipes fully and applied it successfully.

Next time:




Kreditanstalt's picture

The whole premise of this article is that there is something wrong with "inequality", and that therefore the unequal majrity should use their governments to seize assets from "the rich".

How is violence an answer?

If you want personal liberty it's axiomatic that you can't have theft of earnings.  Inequality (and "unfairness") are part and parcel of free market capitalism, which is the only way you're ever going to see personal liberties restored.  How can society have EVERYONE succeeding, no one failing, everyone a safety net and yet still have innovation, drive, risk-taking and increasing production?

A planned economy goes against human nature.

Without failure, without unfairness and inequality, there can be no winners.  No job creators.  No innovators, no risk-takers and no risk capital.  Without the ability of the most savvy and successful thinkers in society to seize opportunity?

That necessitates inequality of outcome. 

Ranger4564's picture

I hate to have to respond to such misguided reflection, but I can't take the crap you posted only to see others refer to it as accurate.  First of all, equality is the fucking goal... if you would step out of the economy and step into society.  The problem is how to achieve that equality while preserving freedoms.  And no, your answer is not the last word, because there is still a lot of history left to write, so please, use your innovative powers to come up with something clever.


That brings me to the most blatant bull shit I keep hearing repeated.  If inequality / untenable situations drive innovation, what the fuck are you or anyone else waiting for? How come the world is not awash in innovative responses to the plight of the citizenry?  Why is the situation getting worse, not better?  Why is everyone waiting for someone else to come up with a solution?  Innovate, you motehr fuckers, my life depends on it.  (Well, not really, but for effect, I'll let that stay).


I'll tell you why.  Because inequality does not motivate innovation, and in fact, neither does capitalism.  Desperation does not breed invention... it breeds desperate behaviors.  Innovation happens when imaginative people analyze the world / conditions and resolve that there are better ways to accomplish something.  Very very few people innovated the computer, in terms of the larger populace.  Very few created the light bulb, the automobile, the anything actually.  So the norm is to not innovate, no matter what economic system prevails.  The norm is for the average loser to wait for someone clever to come along to save their miserable lives.


You can keep waiting, or create a civilization where people are offered support, training, education, resources, to experiment, think, try things, innovate using their imagination.  In fact, the current system stifles innovation, not facilitates it.  I'll give you a prediction... the dismantling of NASA and the privatization of the knowledge that space travel provided will be permanently lost and will result in the fdiminishment of society overall, as private enterprises refuse to share their knowledge. 


Inequality is just that, and nothing more.  I do not aspire to be better than you or richer than you or more powerful than you.  I aspire to my own ambitions.  I was born equal, and no matter what games you a-holes want to play, I will not be subservient, or superior.

AnAnonymous's picture

Desperation does not breed invention... it breeds desperate behaviors.  Innovation happens when imaginative people analyze the world / conditions and resolve that there are better ways to accomplish something.


Wont earn you a popularity contest.

Ranger4564's picture

Haha, glad you replied my brother.  I meant to reply to your posts but I was so busy with work... all those negative junks you kept getting, but you were right most of the time.  You are on the right path I think so keep doing what you're doing, and I will as well.


Take care.



NotApplicable's picture

Good post.

Those who promote institutionalized violence won't understand it, though. They seem to confuse the idea of equality under the law, with equality from the law.

Worse yet, they fail to see how it is just another tool of social distortion, except for how they would like to distort it. If only my candidate could get a hold of the reigns of power, then...

Wishful Thinking 101, living a life of delusion.

As always voters, you have no right, you merely have might. Mob rule can only achieve so much, none of it good.

AnAnonymous's picture

Do forger equality over the law but not equality to the law.


Not that easy to manipulate as freedom that could support that kind of drivel.

AnAnonymous's picture

What a lot of hogwash. Funny as lot though. So many points I wont address them in one swoop.


If you want personal liberty it's axiomatic that you can't have theft of earnings.  Inequality (and "unfairness") are part and parcel of free market capitalism, which is the only way you're ever going to see personal liberties restored.  


Earnings? What is that? Personal liberties restored? Had to be instaured then.

When? When the US was robbing its way to the top, robbing an entire continent?

No ground in reality.

AnAnonymous's picture

A planned economy goes against human nature.


And prohibition of theft does not?


Now let's take a closer look at the story of human nature that US citizens love to repeat.


When  it started, the US has postulated the natural theory of rights, supposedly, according to the US, linked to human nature.

Now let's inject nothing foreign to the US, lets consider the US as a fish bowl, a closed universe.

US has developed natural rights theory? Checked.

US has been a success? Checked.

Has the US enforced the natural rights theory? Not checked. On the contrary, the US has denied their own natural rights theory.

The conclusion: when one looks at the US, it comes that success has been achieved by going against human nature (as weighted by US standards)


The very own example of the US commands to go against human nature.

Bitch Tits's picture

No thinking, reasoning human being can deny what you're saying.

But the truth is, the game is rigged.

That is what most thinking people are angry about and fighting against.

MachoMan's picture

The game is designed to produce winner(s)...  the inevitable conclusion of this game is that it is rigged in favor of those who reach escape velocity for long enough...  they then jigger with the economic gravitational pull (taxes/regulation).  This is the whole point...  some win, some lose...

The justification for this is that through competition, the prices of goods should decline and the profits of any market with sufficient competition should be marginalized...  however, knowing this, the market participants seek to protect their profit shares by whatever means are necessary...  enter the government (given, if successful enough, there are some rights a private party cannot take away).

The simple reality is that both this type of system, and its opposite counterpart, are destined for failure...  boom and bust...  one part of the wealth equation gets too lopsided and the island (lol) overturns...  this happens whether in the pursuit of private gains or as a "benevolent" gesture to hold the country's money in trust as its party leader(s)...  clearly, I think, our concepts of personal liberty are most entwined with the free market approach...  so, this is the failure we choose.

Humans are prone to error and, given a dynamic environment (economic and natural alike), it is simply impossible for us to manage it perfectly...  until we're able to accomplish this feat, we are destined for failure...  

Dirtt's picture

Did I mention that GW failed here?  WTF.

Zero Hedge quoting Ezra Klein.  Is GW a fag?

Dirtt's picture

George Washington quoted Ezra Klein? Are you trying to lose credibility?  Are you begging for scorn?

That decrepit soul Ezra Klein has the credibility of a snail in France during WWII.  Yes Ezra.  WWII IS OLD.

Decrepit Souls like David Carr and Lizzy Trotta and Ezra Klein and Matt Taibbi have no business here.  Why you would quote such under-educated idiots is a mystery to me.  They attended US universities. You couldn't find time to interview inner school students in East LA?  At least that would have provided entertainment value.

Instead. ZERO!