Growth and Stagnation

| Mon Oct. 25, 2010 12:12 PM EDT

After a review of Amar Bhidé’s A Call for Judgment: Sensible Finance for a Dynamic Economy that frankly makes it sound pretty much like a hundred other recent books and magazine articles, Matt Yglesias says we should all read it anyway:

For one thing, though Bhidé doesn't seem super-interested in pursuing this line of inquiry, I think that if it's correct it fills in the microfoundations missing from the argument of Hacker and Pierson’s Winner-Take-All Politics by producing a plausible account of how developments in the financial sector could produce both super-inequality and middle class stagnation through the misallocation of resources away from real economy innovators.

I'm confused. Hacker and Pierson were mostly concerned with the political foundations of income inequality, not the economic foundations. And in any case, isn't this pretty easy? If bankers — and rich people in general — hoover up a larger and larger share of national income, then there's less left over for the middle class.1 Economically, that's pretty much all the foundation you need. The only way you wouldn't get a combination of massive inequality growth and middle class stagnation is if the innovations of the financial sector supercharged the economy so powerfully that the overall pie was bigger for everyone. That's always the prospective argument while this stuff is happening, of course, but in retrospect it hasn't recently turned out to be true. Basically, the rich have spent the past couple of decades recklessly running the economy for their own benefit, and now that they've driven it into a ditch they're spending enormous2 amounts of their wealth to make sure they aren't expected to contribute so much as a penny to help rebuild it. That's really pretty much it. I'm not sure there's any need to overthink this.

1Or vice versa. If you keep middle class wages flat, then there's a bigger pool of money for the rich. I actually prefer this mechanism for a variety of reasons, but the actual inequality numbers work out the same either way.

2Enormous to you and me, anyway. Peanuts to them, of course.

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