"Geez, these lefties are clueless!  Can't even tell when someone's trying to help them.  They think the way politics works is that they explain to everyone else what right and wrong is, and everyone else agrees.  It would make them really annoying if it didn't also make them so easy to manipulate. 

This thing with Rick is working out beautifully.  Now that I'm President, gays are the new blacks, the new angry outsiders, and this is my Sister Souljah move.  The Left flips its lid over a harmless symbolic gesture, I look really reasonable to everyone else, and my plan to govern with 70% of the electorate behind me so I can override filibusters is perfectly on track.  

That'll help with the stim plan, and with climate change and energy independence and health care.  Hey, I'm gonna need all the political support I can get to push that stuff through the Senate.  Then once the stim plan starts to work and we get some results from the other stuff too, I'll have enough political capital to fight the culture wars. 

Boy, the Lefties are gonna feel silly when I start with that.  I won't push gay marriage, but there's no point, because it's a state issue, not a Federal one.  But I'll reform DOMA so the Federal gov't recognizes gay marriages and civil unions in states that have them. Then, once married gays can file joint income tax returns and get those thousand other Federal marriage breaks it'll push the Overton Window on this issue so much farther to the left that gay marriage will start popping in all the blue states. 

I'll have to do something about the gay-military thing, too.  That's a tough one, because those military guys are such giant homophobes.  Some of them think that if there's a gay guy within a thousand yards of them they'll catch it.  Thank God those guys are trained to obey orders. 

Probably I'll start by allowing gays to serve openly in the Reserves and National Guard, and really enforcing the Don't Ask part of Don't Ask, Don't Tell. If I have a couple of commanders demoted for conducting witch hunts, the others will get the message.  Oh, and anyone who does get kicked out or did before gets an honorable discharge.  That way everyone will see the writing on the wall and the guys who can't handle it will have time to leave.  Then I'll have a commission study the reserves and say that it's great and we'll do it for the rest of the military. 

Before I do that, though, I probably should do something about that U.N. Declaration on gay rights.  My God, people are still going to jail for being gay in half the world!  So primitive.  It's mostly the Muslim and African countries, so they'd have a total shit fit if a black President with a Muslim name started lecturing them.  Their people probably like me better than their own leaders, so I bet the leaders will ease up big time on this if it looks like I'm going to make a big deal about it.  That helps me on this issue politically because everyone in the U.S. will agree with that except the wingnuts, and they'll make the whole antigay agenda look really awful.  

Hey, I'll bet Rick would help with that!  He may be against gays getting married, but he doesn't want to see them getting executed or spending their lives in jail for it, I'm sure of that.  And I'll bet he'd love to make all the Lefties look like idiots by proving he's not a hater.  Note to self: call Rick." 

There is an interesting discussion going on at tpmcafe about what ended the great depression, led by Paul Krugman.  It's great, but something seems to me to be missing from the discussion.  It's inequality.

There are clear historical correlations between income inequality and financial instability. Inequality increased during the early 20^th century, peaking in the late 1920s, when we had asset bubbles that led to a crash and the Great Depression. Then, inequality was greatly reduced during the 1945-1973 period, which was financially stable. After that it started rising again, and so did instability, which became increasingly problematic after the brief stock market crash of 1987. Inequality now has again reached 1929 levels, and 1929-level financial instability is also occurring, with the financial system now in a constant state of crisis. I am very surprised that no one is talking much about a causal connection.

It also seems to me that the cause-and-effect links are pretty obvious. When inequality increases, more people experience absolute declines in their standard of living, and go into debt in attempts to maintain their consumption. Also, people at the top of the income distribution have much more money, which creates much higher demand for financial instruments and this leads to bubbles in financial assets. Ultimately, you would expect two things to happen that would reinforce each other: bubbles burst and debtors default, and then you would have a massive disappearance of wealth and a resulting crash in demand.

This is pretty much what happened with the Great Depression, and it's also a very good description of what is happening today.  This would imply that policies to reduce inequality are a long-term necessity. Am I missing something?

Inequality was reduced after the Depression by the New Deal safety net programs such as Social Security, and also by a very progressive income tax, with very high tax rates for the wealthy.  Conservatives like to claim that this kind of progressive taxation stifles growth, but the postwar period turned out to be a Golden Age economically, with strong growth and little or no financial instability. 

I truly wonder why this issue does not get more discussion.  I have searched regular Google and Scholar.Google,com for books and articles on this relationship, and find very little.  I'm not an economist, so there is probably a literature on it that I'm not familiar with, but I also have a suspicion that this topic may be ignored for political and ideological reasons, some of which may be subconscious.  If high inequality could be demonstrated to be bad for the economy as a whole, then a lot of wealthy interests would be threatened. 

If needs to be reduced, how could this be done?  Well, going back to the more progressive income tax would be an obvious answer, as would taxing capital gains in the same progressive fashion.  So would improving the safety net, with government-sponsored health care.  Stillidealistic has an excellent suggestion in this area on her current blog post "How's This for an Outside the Box Idea?"  Her proposal is to pay parents to stay home with their children, at least while they are young.  In addition to giving children more time with their parents, this would contract the labor supply and drive up wages.  It should be pointed out that this occurred after WWII when many women who had worked during the war left the labor force and had children, and the result was an economy in which a single earner made enough to support a family.   

A great deal of thought is being given to the topic of how best to stimulate the economy.   Overall spending seems to be falling off a cliff, with consumer, business, and state and local government spending all declining sharply.  In order to prevent the natural acceleration of this process caused by lower spending from the newly unemployed, economists and policymakers have largely reached a consensus that the federal government must step in and boost its own spending to rescue the economy.  This fiscal stimulus is now seen to be just as necessary as the banking rescue plan adopted recently.

The question then becomes: what is the best way to do this?  Obama and his economic team are proposing a combination of tax cuts, public works, increases in the social safety net (unemployment insurance, food stamps, heating assistance, etc.), and aid to states and localities.  Figures discussed are in the range of $500-$700 billion. 

The difficulty here is that consumer spending constitutes about two-thirds of overall spending in the economy, and too large a fraction of the proposed stimulus program is channeled to the other components of spending, such as construction and direct spending by government, and not enough to consumers.  The consumer component, tax cuts and safety net increases, is difficult to estimate from readily available information, but seems to be in the range of only $100-$200 billion, and a large fraction will be in the form of tax cuts to those who are well enough off that they will not need to spend them. 

What should policymakers do?  In the 1960s and 1970s a widely discussed policy option was the negative income tax (NIT), a progressive idea that was championed by conservative economist Milton Friedman.  In the NIT, the idea of a progressive income tax is extended so that poor people pay negative tax, which means they receive money from the government instead of paying it.   Currently, the federal government does have a negative income tax, called the Earned Income Tax Credit (EITC), but it is relatively modest, with outlays in the range of $35-$40 billion annually, and does not cover non-earners, who tend to be the poorest.  

I would propose a much, much, larger NIT, which would return at least $1000 to every household.  Those in the top four deciles (tenths) of the income distribution (the top 40%) would receive $1000, those in the fifth decile would receive $2000, the sixth decile would receive $3000, and so on, with the bottom decile, or poorest tenth of the population receiving $7000.  With about 115 million households in the U.S., this would cost roughly $355 billion annually, which is still only half of the upper figure discussed for a necessary stimulus package.  Over 80% of the NIT money would go to the bottom half of the income distribution in this scenario, with the roughly 20% for the upper half accomplishing the necessary purpose of creating widespread political support.

The moral arguments for a negative income tax have always been clear and simple.  It relieves economic suffering on the part of those who suffer most, and it significantly reduces income inequality.  The counterarguments, which are strong and, to me, usually persuasive, are that in weakens incentives to work (this has been tested and demonstrated empirically) and that it is unfair to those who are hardworking and productive to take their money and give it to others. 

The important, point, which I don't believe has been made by anyone else, is that under conditions of severe economic recession, these counterarguments do not apply.   Incentives to work may be weakened somewhat, but this will have no effect on labor markets and overall labor force participation because the demand for jobs will still exceed the supply of them so greatly that available jobs will continue to be filled quickly.  In fact, pushing people to work more due to hardship would only cause the displacement of willing workers with unwilling ones, which makes the economy less productive, not more. 

As for the argument that an NIT is an unfair burden on productive workers, this also does not apply because here the NIT is only using money that must be spent anyway in order to stimulate the economy.  In fact, the best way to minimize the taxpayer burden of a stimulus program is to maximize the degree to which stimulus checks are actually spent by consumers.  Therefore, a program that predominantly targets the poor, who will need to spend money immediately, actually keeps the long-term burden on taxpayers to a minimum. 

People may argue that this program will be a political non-starter because no one wants to give money to the poor.  I disagree.  First, this proposal is sound economic policy.  Second, it gives money to everyone without raising taxes, creating buy-in on the part of many taxpayers.  Third, and most telling, it costs only half of what Congress has already given to banks.  If it is politically possible to give $700 billion to negligent wealthy bankers, whom no one regards as deserving, then it must be politically possible to spend only half of that on everyone in the country. 

The way to do this would be to label it as a temporary expansion of the EITC, for the purpose of maintaining consumer spending while the economy is in recession.  The payments would last until the unemployment rate drops below 6%, when they would be cut in half.  When the unemployment rate drops below 5%, the payments would end. 

This program would be an enormous help to those who are suffering the most.  People who have to choose between food and medicine, people who can't pay their bills, who are in danger of homelessness, all would be helped.  Many working poor could replace possessions that are old and worn out.  Some would junk very old cars and buy newer used cars.  And all this alleviation of human suffering would also keep the economy afloat.  Win-win. 

Many people will doubt that enacting such a program is possible.  We should consider the example of the Bush administration.  While generally incompetent, they were masterful at using whatever circumstances were at hand to create political pressure for policies that were not inherently popular.  They did this with 9/11 to start a war with Iraq, and with the financial crisis to divert enormous sums to investment banks.  While I would never copy their morality or their policies, their political playbook should be studied.  Their now exists an economic crisis that has the nation scared.  If the Bush administration could use crises to frighten the country into bad policies, why can't the Democrats use one to frighten the country into good policies?

We have a progressive President and Democratic majorities in both houses of Congress.  We also have a crisis for which this proposal is perfectly suited.  If enacted, it would boost consumer spending significantly and immediately, unlike many other interventions, which take up to a year before they work.  This could prevent the current economic crisis from getting much worse.  Paul Krugman, Nobel Laureate, says 'Go big', on stimulating the economy.  This is the way to do it.