Responses to my response to Joe Stiglitz have varied. Some are outraged that I might suggest that inequality isn’t the source of all problems — there are even some suggestions that I am acting as an apologist for the plutocrats, which will come as news to the plutocrats. But there have also been some interesting points raised.
About the first bit: I often warn on this blog about the pitfall of making economics into a morality play in which doing what you think is right is also the magic elixir that solves all problems. Usually I’m criticizing the kind of people who believe that deficits are terrible, awful, and therefore that slashing deficits now now now will promote recovery — when it would actually kill it. But progressives need to be careful too; if you find yourself telling a story in which the changes you want to see in American society just happen to be exactly what we need to improve economic performance in the next year or two, you should make a point of asking yourself whether you’re really being objective.
Personally and politically, I would have loved to write a piece blaming slow growth on inequality. But I couldn’t and can’t convince myself that the theory and evidence really support that view. Inequality is a huge problem — but not for employment growth in 2013 or 2014.
OK, there have been some interesting points made in relation to that statement, most of which I agree with.
Duncan Black suggests that there’s still a macroeconomic case for targeting economic aid on people with lower incomes; e.g, food stamps yes, cuts in the capital gains tax no. Very much so! In fact, in a way the same argument I made for not making too much of high-income saving and low-income dissaving also makes the case for aid right now to the bottom half of the distribution.
Here’s how it goes: at any point in time, those with lower incomes include a high proportion of people doing temporarily badly. Many of those people will be “liquidity-constrained” — out of liquid assets, and unable to borrow except at high rates. These are people who will spend a large fraction of any aid, and therefore transfers to that group will have a much bigger multiplier effect than, say, tax cuts for the rich.
It’s even better, of course, to target aid on those we know are in temporary distress — which is why unemployment insurance is an especially effective stimulus.
Dean Baker makes a couple of very good points, one on saving, one on the budget. I pointed out that saving seems to have declined, not increased, as inequality rose; Dean points out that sharply rising asset prices might be the explanation. Fair enough, although I think the burden of proof is on the other side: if your claim is that inequality causes a persistent shortage of consumer demand, you should find the actual strength of consumer demand problematic.
Dean also makes a terrific point about inequality and the budget: while taking from the poor and giving to the rich probably increases revenues, it also increases spending on means-tested programs, so the budget effect may be negative after all. Indeed: I should have remembered that the highest effective marginal tax rates in our system fall on low-income working families (pdf), who lose benefits as their incomes go up. I doubt that even so the effect can be large, but it’s always a good idea to remember that we have a tax-and-transfer system, not just a tax system.
So, interesting stuff — and it’s good to be having a real discussion about these issues. I still think that we need to fight inequality for long-run reasons, and that trying to shoehorn the post-financial-crisis weakness into the same framework just weakens our credibility. But it’s not a big deal.