Over at the Washington Monthly, I've got a big piece about why inequality is a danger to economic growth, and what to do about it.
The case is pretty easy to summarize: Most of the economy is consumer spending, so with median incomes flat, the only way to keep economic growth going is by increasing household debt. But that's unsustainable, since you eventually reach a point when everyone realizes that they can't take on anymore debt. Consumers then pull back their spending and aggregate demand collapses, causing a recession that is hard to recover from because consumers are buried under big debt overhangs. You can't spend if you don't have a job and are underwater on your mortgage.
The solution is obviously redistribution (I'm using the term here in a general sense). The bottom half or so of the income ladder needs a source of purchasing power that isn't vulnerable to the perilous dynamics of increasing household debt. Personally, I favor granting the Federal Reserve the power to give new money to every citizen on an as-needed basis.
But let's set particular policies aside, and focus on the actual reality of redistribution, which has been a bedrock part of our economy since inequality started to take off in the mid-1970s (see my piece for details). The thing to realize is that an economy in which the very rich capture practically all the gains of economic growth will need redistribution on an immense scale to remain growing. Before the financial crisis, we did this through household borrowing. As Steve Randy Waldman, who generously helped me with my article, has written, "Household borrowing represents, in a very direct sense, a redistribution of purchasing power from savers to borrowers."
This means that once consumers dig themselves out of the debt they're buried under, there will be a massive economy-wide incentive to inflate another debt bubble. It will get growth going again, and it will probably pay off in the short run. But it will be similar to the housing bubble, when voracious demand for investments that paid a decent return created an entire industry in horrifically irresponsible lending.
So if we don't enact some kind of transfer scheme we'll get redistribution anyway. It will just be the kind that tends to end in financial crisis and mass unemployment.
Conservatives hate transfers down the income ladder on "just deserts" grounds, believing that both rich and poor have "earned" their respective incomes (or lack thereof). Therefore, it would be unjust to subsidize the "takers," especially by taxing the rich. Such ethical reasoning is patently ridiculous, but the above logic shows just how unjustifiable such a stance is in economic terms. Left to their own devices, the rich will conjure a poor-subsidizing transfer scheme of their own volition! It will just be cruel and horribly inefficient.
