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December 14, 2013 3:33 PM President Obama and Paul Krugman are right: economic inequality is a “defining issue of our time”

By Kathleen Geier

Actually, I would argue, as President Obama did last week, that economic inequality is the defining issue of our time. But in a blog post today, Krugman characterized it as a defining challenge,”, and I don’t want to put words in his mouth.

In his post, Krugman makes four important points:

1) First, he says, the “sheer quantitative” impact of economic inequality has been extremely powerful. He notes that according to research by economists Thomas Piketty and Emmanuel Saez, since 2000, “the income of the bottom 90 is about 8 percent lower than it would have been if inequality had remained stable.”

2) Second, the economic downturn has been caused, in part, by economic inequality. He argues that:

high saving by the 1 percent, with demand sustained only by rapidly rising debt further down the scale — and with this borrowing itself partly driven by inequality, which leads to expenditure cascades and so on.

3) Third, there’s the political economy argument. Economic inequality has increased “the political power of the 1 percent.” This, Krugman observes, led to policy failures before and after the economic crisis — the deregulation and financialization of the economy, pre-, and austerity economics, post.

4) Finally, he points out that the causes of skyrocketing economic inequality are still somewhat mysterious. And since, he argues, we don’t fully understand what policies are needed to reverse the trend, “it makes very good sense for progressives to focus much of their energy on the issue.”

Krugman strengthens the case for #1 in a subsequent post. The only one of his arguments I would quibble with a bit is #4. While it’s true that the exact pathways that led to such alarmingly high rates of economic inequality are unknown, we have some pretty strong hypotheses. More importantly, the policy fixes for economic inequality are fairly clear: in no particular order, they include a higher minimum wage, stronger labor unions, a more progressive tax system, a more generous social welfare state, macroeconomic policies that promote a full employment economy, and much more powerful government regulations, particularly in the banking and finance sector. UPDATE: Some other things I’d add to my wish list include changes in education policy (namely, universal pre-K and free public colleges); changes in trade policy; and political reforms such as the public financing of elections, easing voter registration, and ending the filibuster.

The obstacles to those policy solutions are not technical, but political. Those political impediments are daunting: how do progressives build a successful movement for change? How do we get around the institutional features of the American political system that make change so difficult — like the high number of counter-majoritarian veto points (bicameral legislature, Senate filibuster, federalism, etc.)? Those are the challenges that keep progressives up at night — and will no doubt continue to do so for years to come.

Some additional points I’d like to add to Krugman’s: research shows that economic inequality is associated with a host of social pathologies (which you can learn more about by watching this video). Also, I would contend that the strongest argument as to why economic inequality is so destructive is the political economy one. When elites gain the kind of extraordinary political power they have now, they game the system, and democracy becomes dysfunctional. Our elected representatives have powerful incentives to pursue a political agenda that caters to the one percent but ignores the needs of everyone else. This is the compelling argument made by Hacker and Pierson in their book, Winner-Take-All Politics. Research by political scientist Larry Barlels has reached similar conclusions .

Economic inequality also has the unlovely quality of greatly exacerbating nearly every other social, political, and economic problem that exists. The reason for this is, partly, the political economy effect of inequality I discussed above: that it tilts the political playing field in such a way that advantages special interests relative to the rest of us. Therefore, urgent political problems don’t get solved — or they are resolved in ways that make them even worse. Also, because poor countries and localities have fewer economic resources to devote to solving their problems, they suffer disproportionately from the challenges they face, as in the case of climate change.

Finally, economic inequality leads to a arms race-type scenario where market logic tends to trump all other values and considerations, leading to suboptimal outcomes. Even those individuals, firms, and governments that don’t wish to enact a particular policy or engage in a particular behavior are inexorably swept along anyway, because of the powerfully disproportionate pull of the strongest economic actors. Examples of this include people buying larger homes than they’d prefer so they can be located in a good school district; Walmart’s suppliers being squeezed to outsource jobs to cut labor costs, lest they risk losing their powerful distributor; and poor countries signing trade agreements they’d rather reject, for fear that the economic consequences of opting out of them would be even worse than those of opting in.

Speaking of economic inequality, as those of you who follow my work may know, I believe that economic inequality is such a vital issue that I recently started a blog devoted to the subject. It’s called Inequality Matters, and you can find it here. I invite you to visit the blog and read some of the posts I’ve written in the past week or so, including:

This post, about economic inequality in South Africa;

This one, about how conservatives are — still! — lying about the minimum wage. I provide an overview of what the empirical research says about the impact of the minimum wage on employment, and also describe an alternate model for labor markets that provides a theoretical explanation for the minimum wage’s effects.

— Finally, there’s this post, which busts commonplace poverty myths. It pivots off the recent controversy centering on an essay about being poor by writer Linda Tirado, which went viral. I argue that she’s been unfairly attacked mainly because she doesn’t resemble the familiar stereotype that many people have of what a poor person looks like.

Given the growing importance of economic inequality in the nation’s political discourse and policy agenda, I know I will have plenty of things to blog about. So do check out the site.

UPDATE: See also Brad DeLong’s, Dean Baker’s, Jared Bernstein’s, and Steve Randy Waldman’s responses to Ezra Klein’s argument.

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

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