Wednesday, December 15, 2010

Bad Theories...

I don't like inequality, and there is certainly an apparent parallel between how much inequality we have in this country and how messed up the financial sector is. Maximum levels of inequality in the US happened just before the Great Depression and the current really bad recession.

However, this theory as to why that may be is pretty weak. This article (from which the first takes cues) is more detailed and more sound, but still misses a few things that seem pretty critical.

Rising inequality is a symptom of a political problem, a circular one. Rich people support politicians who will cut their taxes making them more rich, and more politically powerful. Meanwhile the shortfalls of lower tax revenue tend to most hurt the poor and further weaken their already small political power (until we have publicly financed elections, money = political power). It doesn't matter that a large majority of people in this country would be supportive of a hike in the taxes for the top earners, those top earners have more real say in how the politics shake out and their will is more strongly represented in congress (and in the presidency...at least the last 3 and at least 4 of the last 5).

That rising inequality would coincide with a rise in finance is perfectly sensible. After all, at some point you run out of things to do with money other than hoard it or give it away. Most rich people opt to hoard it; that means finding someplace to park it, and since they are clearly greedy they want to make more money with that money so finance is the way to go. This will, naturally, make finance people extra wealthy as well, and will do relatively little to help the bulk of people in this nation.

The fix is political: higher taxes for the wealthy and higher capital gains taxes in particular. This first means more money for the government that can be used to improve the lives of all citizens but particularly the poor and middle classes. This also means less money poured into investments, which means better, smarter resulting investments and less runaway craziness like the housing bubble, and less productivity drain by the finance sector on the rest of our society.

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