What Democrats get wrong about inequality

In the traditional rhetoric of American politics, there's a tradeoff between prosperity and fairness. Accept more inequality and we'll get the fast growth that brings about long-term improvements in living standards. Conversely, the argument goes, direct more money down the socioeconomic ladder, and the poor will get a temporary boost, but at the cost of long-term growth. In the postwar years, it was Reagan who most prominently embraced this idea, and whose policy agenda was most dedicated to distributing more income up the income ladder.

Unthinking acceptance of this tradeoff is still common across the political spectrum. Even committed liberals typically frame inequality as an issue of fairness rather than a structural economic problem.

This is wrong. And there are an increasing number of reasons to think that this conventional wisdom isn't just false, but actually backwards. A growing body of evidence suggests that inequality isn't just an issue of fairness, but is actually hampering general prosperity. And that, in turn, ought to have enormous knock-on political effects.

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That inequality is choking growth is the conclusion of the new issue of the Washington Monthly, including articles by Heather Boushey, Mike Konczal, Alan Blinder, and Joe Stiglitz. It comes on the heels of several other studies, even one from the IMF, traditionally a very orthodox institution, that reach the same conclusion.

There are various complex models for this, but the general explanation is fairly intuitive: Modern economies are built on a mass market. But if the great majority of people don't have much (or any) disposable income, then there is no mass market, and it's harder to start a business relying on any kind of mass sales. And with weak consumer spending, existing businesses have little reason to invest in growth, and instead disgorge their profits to shareholders, exacerbating the trend. In the end, you get a hollowed-out, bifurcated economy, where low-grade goods are sold to the broke masses on razor-thin margins, while incomprehensible sums slosh around weird luxury markets.

It's worth drilling in on Konczal's article especially, which concerns the financialization of the U.S. economy. Deregulated financial capitalism is supposed to be hyper-efficient at mobilizing society's risk-bearing capacity. That is nonsense.

Not only is the supposed "innovation" in high-tech finance showing no evidence of doing any general good, but finance is actually worse at its most basic tasks than it was 50 years ago!

There is no denying that finance is an enormous factor in inequality. So bringing down inequality will necessarily involve smashing regulatory hammer blows against Big Finance. That means breaking up any bank with assets over 10 percent of GDP (like JPMorgan Chase, Wells Fargo, and Bank of America), tighter controls over international capital flows, sharply higher reserve requirements, and so on. But here's the key thing: Konczal's (and other scholars') work shows that we have little to fear from putting the screws to the big banks. Making our system more fair will not make our country less prosperous.

That brings me to the politics. Democrats have typically been reluctant to put inequality front and center, probably because they don't want to be perceived as anti-growth. When pollsters ask questions about inequality, it's typically described as an issue of concern but not a high-priority one. But that is probably due to the way the issue has been framed for the last several decades. Inequality is not merely an issue of fairness. It's an issue of growth.

The left shouldn't be afraid to make this case boldly and straightforwardly. It turns out average people have been disastrously misled on this issue by decades of neoliberal propaganda. Pushing to cut ordinary people back in on the fruits of growth is not just fundamentally good politics, but can be expected to work quite well.