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Yes, income inequality is unfair. But liberals can make a stronger argument.
Turning "structural reform" on its head
 
Higher pay for low-income workers translates to a stronger economy for everyone.
Higher pay for low-income workers translates to a stronger economy for everyone. (Win McNamee/Getty Images)

Reducing economic inequality is now pretty firmly in place on the Left's agenda. Usually, the liberal argument tends to boil down to the inherent unfairness of a tiny fraction of the population capturing literally over 100 percent of income growth over the last few years. In turn, the rich respond with scandalized, breathless outrage at the idea that anyone can make too much money.

However, there's another way to look at the issue: through the lens of structural reform. Classically speaking, this is IMF-Washington consensus shorthand for a whole suite of policies: austerity, "liberalizing" labor markets, privatization, and so forth. The idea is that these policies are needed to streamline the market and ensure faster long-term growth. Never mind the labor-smashing aspect, which amounts to top-down class warfare on an international scale — it's hard to argue against faster long-term growth.

So it's only fair to turn structural reform on its head and ask for a little consistency from capital's hired guns.

How might income inequality harm growth? I wrote a long piece about this, but the case is fairly easy to understand. Consumer spending accounts for the bulk of economic activity, but since the mid-1970s the very rich have been capturing most of the gains of economic growth, and they save proportionally more of their money. With the rich eating most of growth, aggregate demand will tend to fall. From the mid-70s until 2007, consumer spending was propped up by household borrowing, but there's only so much debt households can take on. With median wages flat and consumers buried under debt, it turns out it's very, very hard to recover from a devastating recession.

These days, selling to the rich at colossal markups — whether it's luxury cars, yachts, or watches — is where much of the big profits are. With a few exceptions, capitalism has become a machine by and for the extremely wealthy, with the rest of humanity bystanders at best or active victims at worst.

Think about it like this: In the decades after World War II, we had an economy that was geared toward the mass market, however imperfectly. Growth was strong because there was an enormous market to sell to, and everybody had a bit of disposable income. But as the bulk of the population has become increasingly alienated from any rewards to growth, that paradigm has broken down. We have chronic unemployment because we have a huge structure dedicated to mass production, but the population doesn't have enough money to buy mass output.

Meanwhile, due to entropic decay, our mass production structure is rotting. Former Treasury Secretary Larry Summers recently had a great phrase for this: "Lack of demand creates its own lack of supply."

Put more formally, we've got a systematic divergence between our capacity to produce and our capacity to consume. Fortunately, a lack of capacity to consume (having no money) is very easy to solve (giving people money). I've made the argument before that the Federal Reserve should hand out wads of cash, but there are other means for the government to achieve this end, including guaranteeing a basic income, beefing up food stamps and the earned income tax credit, or even just cutting taxes at the bottom.

In other words, what the inequality-of-consumption argument above implies is that, all things being equal, even simple cash transfers down the income ladder should be growth-positive. I earnestly await the Very Serious People in the structural reform crowd to start aggressively arguing for income redistribution.

 
Ryan Cooper is a national correspondent at TheWeek.com. His work has appeared in the Washington Monthly, The New Republic, and the Washington Post.

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