The Richest Blow Past the wealth of the Tycoons of the 1920s INCOME INEQUALITY

http://www.alternet.org/economy/americas-rich-may-soon-blow-past-roaring-twenties-tycoons?akid=13935.294211.d15amH&rd=1&src=newsletter1049911&t=4

A  new paper  by economist Lance Taylor for the  Institute For New Economic Thinking  takes on the way economists have looked at wealth and income inequality. Taylor’s research challenges some conclusions about what’s driving inequality made by Thomas Piketty and Joseph Stiglitz. What’s really causing the startling gap between haves and have-nots? Is it mechanical market forces? Outsourcing? Real estate? As Taylor sees it, economists have gotten the answer wrong. Worker exploitation and outsized business profits are factors, but even more key are the unjustified payments to the wealthy generated by our outsized financial sector. This hasn’t just “happened.” Flawed economic theory and politicians beholden to the rich lead to policies that make it happen. We can fix the problem, but it will take bold steps.*A version of this interview originally appeared on the Institute's blog. 

Lynn Parramore: You recently dived into the debate on what causes wealth and income inequality — and whether or not we can fix it within the existing social order. Heated discussions among economists got touched off by Thomas Piketty’s bestselling book, Capital in the Twenty-First Century, but you say that a key part of the story is actually a debate that happened in the late 60s and early 70s. What is it and why should we care?

Lance Taylor: It’s key because mainstream economists have been wrong in how they think about inequality for a long time. Which means that they haven’t been particularly helpful in solving the problem. This is one of the key challenges of our time. We can do better.

The debate from the 60s and 70s is known as the “Cambridge capital controversy” and took place between economists at MIT in the U.S. and at Cambridge University in the U.K. First, especially for the Brits, it was about whether distributions of income and wealth are partly shaped by social and political relationships – class conflict if you will – or mostly by “market forces.”

 existing social order does not necessarily guarantee that the rich will get richer (remember Keynes on the essential uncertainty of the future). But even if they do, a stiff tax on capital gains could be used to build up a socially-oriented wealth fund that would help offset that.

Look at Norway’s “oil fund,” which takes a cut of petroleum revenues and invests the money while giving a small annual pay-out from its investment returns. An example closer to home is California’s CalPERS retirement fund. The key point is that such funds can save at a higher rate than wealthy households, amassing market power and potentially using capital income for social purposes.

In the labor market, real wages of employees have lagged productivity growth, which is why the profit share for the boss has gone up. Outsourcing has played some role, but policies and legal interpretations (think of so-called “right to work” legislation and attacks on public sector unions) that reduce labor’s bargaining power have been more important. Recreating that power could reverse the trends and slow the accumulation of wealth. Our studies and others suggest that simply raising taxes on the rich and transferring the proceeds downward in the income distribution will not have a large immediate effect on distribution, but the impacts could cumulate over time.

It is possible to reduce U.S. wealth and income disparity, but reversing the trends of the past 30 or 40 years that got us there will not be easy or quick.