Even Forbes Gets It. Why Can't Steve Harper?

Forbes, yes that Forbes, the business magazine understands the damage that income inequality is exacting on America's economy.

New research indicates that growing income inequality isn’t just unpleasant; it is seriously hurting the U.S. economy. And economists are figuring out just how the damage is done, according to a fascinating new article by the journalist Jonathan Rauch in National Journal. This challenges a long-standing consensus that, as Rauch puts it, “inequality is the price America pays for a dynamic, efficient economy. . . . As long as the bottom and the middle are moving up, there is no reason to mind if the top is moving up faster.”

...The Congressional Budget Office recently reported that between 1979 and 2007 the top 1% of households doubled their share of pretax income while the share of the bottom 80% fell. Then came the great recession. Economists including David Moss of the Harvard Business School noticed that “the last time inequality rose to its current heights was in the late 1920s, just before a financial meltdown. . . . In 2010, Moss plotted inequality and bank failures since 1864 on the same graph; he found an eerily close fit.”

 But does that imply a cause-and-effect relationship? It looks that way, Rauch writes. Economists have been tracing the following chain of causality. Those who make the least consume the most of their income; those who make the most tend to save a great deal, and for that reason, according to the economist Christopher Brown, at Arkansas State, “income inequality can exert a significant drag on effective demand.” Rauch writes that

 In a democracy, politicians and the public are unlikely to accept depressed spending power if they can help it. They can try to compensate by easing credit standards, effectively encouraging the non-rich to sustain purchasing power by borrowing. They might, for example, create policies allowing banks to write flimsy home mortgages and encouraging consumers to seek them. Call this the “let them eat credit” strategy.

Then “the economy, propped up on shaky credit, becomes more vulnerable to shocks. When a recession comes, the economy takes a double hit as banks fail and credit-fueled consumer spending collapses.” The instability this time was worsened by the fact that the ever-richer richest Americans “needed liquid investments into which to put their additional wealth. Their appetite for new investment vehicles fueled a surge in what Arkansas State’s Brown calls ‘financial engineering’—the concoction of exotic financial instruments, which acted on the financial sector like steroids.”

So as income inequality grew, the government propped up spending by promoting easy credit for less wealthy Americans, and much of the profit from that easy credit fed the wealth of the richest, widening the gap between rich and poor yet further. “Alas, when the recession struck, the financial sector’s gigantism and complexity helped turn what might have been a brush fire into a meltdown.”

There doesn't appear to be much new in the Rauch article that isn't already well chronicled in Stiglitz' The Price of Inequality and other works.  It's just that even the voice of business is now speaking out and accepting income inequality as a scourge on the economy.

When will the Conservatives, or the Liberals for that matter, finally get it?   This is a problem that, even in Canada, can rapidly get out of control and the more it grows and the further it damages the economy, the harder it will be to rectify.