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How does inequality affect stability?
I
would like to see some comments from economists on how the inequality
of wealth and income between the capital and consumption sectors
affects economic stability.
It seems to me that over the last several decades wealth and income has
become concentrated in the capital sector while the consuming sector
has required debt to sustain its consumption. When the world is awash
in investment capital and investors can't find productive places to
invest, they drift toward riskier investments and look for ways to
sustain their diminishing returns through the use of leverage and
derivatives that expand the money supply and hide risk. This leads to
bubbles of fictitious wealth of one kind or another as the price of
assets are bid up artificially. These bubbles ultimately burst and the
economy freezes up as investors and consumers lose trust in the system.
I see no way to avoid such instability unless government is willing to step in and rebalance the wealth and income in the capital investment and consuming sectors through adjustments in the way these sectors are taxed. It doesn't seem to make any sense to reduce taxes on capital gains when money is piling up in the capital sector, while the consuming sector is using debt to sustain its consumption. At such times it would seem more reasonable to increase capital gains taxes and reduce taxes on the middle class, which make up the largest portion of the consuming sector.
Do current economic models account for this wealth distribution effect? The federal reserve is an institution of the capital sector and it has control of monetary policy. Does this lead to wealth and income accumulation in the capital sector at the expense of the consuming sector? GDP growth seems to be the main goal of this institution, while it is a poor measure of the well being of the greater society. It seems to me that government should have more control to prevent bubbles from developing.
I see no way to avoid such instability unless government is willing to step in and rebalance the wealth and income in the capital investment and consuming sectors through adjustments in the way these sectors are taxed. It doesn't seem to make any sense to reduce taxes on capital gains when money is piling up in the capital sector, while the consuming sector is using debt to sustain its consumption. At such times it would seem more reasonable to increase capital gains taxes and reduce taxes on the middle class, which make up the largest portion of the consuming sector.
Do current economic models account for this wealth distribution effect? The federal reserve is an institution of the capital sector and it has control of monetary policy. Does this lead to wealth and income accumulation in the capital sector at the expense of the consuming sector? GDP growth seems to be the main goal of this institution, while it is a poor measure of the well being of the greater society. It seems to me that government should have more control to prevent bubbles from developing.
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Could you do at least me and my old eyes the favor of going back an editing this diary so as to make the type a tad larger.
December 31, 2008 3:13 PM | Reply | Permalink
.
Happy New Year Fox
If you look up on your browser bar, you'll see "File" "Edit" and "View." Click "View" then click "Zoom" then "Zoom in" and you can control the size of the text to your desire.
It's amazing what these computers can do.
~OGD~
January 1, 2009 9:35 AM | Reply | Permalink
Yeah, I am old and half blind also. But I support everything you have written. Good Post.
January 1, 2009 12:11 PM | Reply | Permalink
If we have any knowledge of history, the one-word answer is: Negatively.
Disclaimer: I am not an economist.
January 1, 2009 1:40 PM | Reply | Permalink