Stark Inequality, Bad Economic Policy

By Elizabeth Palmberg 8-03-2010

As is pretty universally agreed by economists and (these days) ignored by many politicians -- who seem determined to run on a Herbert Hoover platform -- in the short term, the government must and should run deficits in order to restart the economy. In the long run, however, as economist Marcellus Andrews argues in "Taming the Beast" in the August issue of Sojourners, we must return to surpluses in good times, as the U.S. ran during the Clinton years. A key part of that, as Andrews argues, must be cutting the bad cocktail of military spending and tax cuts for the rich which led to such high deficits during the Reagan and both Bush presidencies:

The problem comes from borrowing in the Reagan and George W. Bush eras to finance a lavish party -- all those tax cuts for the rich -- which did nothing to improve our nation's income and capacity to pay off the debt in good times.

A recent article in The Nation points out that income inequality, which was fostered by those tax cuts to the rich, actually was a key cause of the housing bubble, whose crash got us into the current recession:

In the three decades after World War II, there were no notable bubbles in the economy. Productivity growth translated into wage growth, which in turn led to more consumption. The increased demand led to more investment, productivity growth and wage growth.

This virtuous circle was broken by Reagan-era policies intended to weaken the power of ordinary workers. Wages no longer kept pace with productivity growth, eliminating the automatic link between productivity growth and demand growth. This led to excess capacity in the economy, which was filled in the 1990s with demand generated by the stock bubble and in the 2000s with demand generated by the housing bubble.

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