The Income Gap Will Grow

In general, macroeconomic policies cut two ways on inequality — one via effects on economic activity, which if favorable, can reduce inequality by creating more jobs and raising wages, and the other through effects on the stock market, which can make inequality worse if stock prices rise.

Thus in the 1990s the technology boom reduced inequality by increasing employment and low-end wages, while the NASDAQ bubble drove up incomes for a few. The second effect dominated the statistics, but the first dominated the experience most working people had: it was a good time.

The premature and excessive deficit-cutting plans now being framed will almost surely hurt working and retired Americans: they will increase unemployment, decrease hours and overtime, place downward pressure on wages, and in all these ways make low-income workers worse off.

Their effect on the stock market is less clear. The plutocrats behind these plans apparently think that stocks will go up, increasing inequality (in their favor). They may be right but I’m not sure; Japan has discovered it can be hard to have a stock boom in a depression.

When you examine the specifics, ambiguity disappears. While there are progressive variations with better results, the main Bowles-Simpson proposal is an assault on the middle class, the working class and the poor.

Cuts in Social Security will gradually increase poverty and early death among the old. Cuts in the mortgage interest deduction will further drive down home values while hardly affecting those rich enough to pay cash. Killing the Earned Income Tax Credit will reverse a highly effective anti-poverty program for working people. Meanwhile Bowles and Simpson hold the line on the top rate in the income tax, and they say nothing about a financial transactions tax. This is most revealing.

Budget-balancing is crackpot economics, yet these proposals illustrate clearly the true underlying goal. Increasing inequality, it would appear, is the point.