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October 23, 2008

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Tom

The thesis that gross income disparity is sub-optimal is, I think, tenable. But most methods to correct income disparity are also sub-optimal and may be even immoral. It's not difficult to envision a strawman scenario where income disparity was the leading cause of financial meltdown, and a lot of lazy thinking may lead one to that conclusion. But in this case, it's clear that this person is just looking for a scape-goat, and it's especially easy to attack a demographic that represents a very small fraction of the total population.

Nathan Smith

re: "It's not difficult to envision a strawman scenario where income disparity was the leading cause of financial meltdown..."

Actually, I do find it difficult. I can't think of a theory that would link the two.

Nato

Gross income disparities are probably corrosive to economic optimism insofar as the lifestyles of the very rich inform our cultural idea of respectable, acceptable success and self-sufficiency. The tendency of people to exert the most effort to improve their personal economic value over the long term seems to be heavily influenced by their ability to believe that some significant level of success is obtainable, and that their outcomes are more determined by their own efforts than the whims of economic oligarchs. Of course, class-warriors intentionally bring the lifestyles of the rich to our cultural notice specifically to stoke feelings of inferiority and resentment. On the other hand, there's a certain irony in a very mobile, fair, and inequal economy: if one fails to succeed, it's much more discouraging because it's easier to take financial success seriously as a measure of one's fundamental worth.

Tom

"Actually, I do find it difficult. I can't think of a theory that would link the two."

Well, if the majority in the US suddenly decided to enslave the minority and dispossess them of their wealth and income, then I imagine the economy would collapse. What sort of mechanism would lead to that? Maybe theology. It's certainly happened to other empires.

Nathan Smith

I could tell the opposite story on optimism: the example of the rich shows what's possible and makes people work harder. But neither this story nor Nato's seems to explain financial *instability*.

If Tom's story is applicable to the US case, it would seem to mean: if the country is very unequal, the relatively-deprived few will want to enslave the ultra-productive few and take their surplus. This involves solving a collective-action problem; and the vagaries of organization might make redistribution take the form of a sudden threat sparking a collapse, rather than a prolonged drag on growth. In other words, financial markets are spooked by the prospect of an Obama/Democratic-Congress victory, and that's why they're melting away. That is, I grant you, a plausible story that links inequality and financial turmoil. It's not one that Obama supporters would be inclined to spread around. I also doubt that it's true, at least as an account of how the financial crisis got started.

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