Tuesday, 28 October 2014

The cause of rising inequality in America

In Reaganomics, not QE, caused inequality Alan Kohler nails the real reason for growing inequality in America. If you only read one article on economics this year then read Kohler's.
Rising inequality began in the 1980s and was the direct result of Reaganomics, and more specifically President Reagan’s decision to cut the top marginal income tax rate from 70.1 to 28.4 per cent as well as the maximum capital gains tax rate to 20 per cent.

That had such a horrendous effect on the Federal budget that Reagan took back half the 1981 tax cut, but since then the top marginal tax rate in the US has remained lower than at any time since 1931, when it was raised from 25 to 63 per cent.
The benefits of the 1980s tax cuts for the rich were meant to trickle down, but they were captured and held onto instead, and now zero interest rates and quantitative easing are increasing the value of their assets.
Less than a decade after the repeal of Glass Steagall, the global banking system seized up, effectively insolvent.

At the risk of over-simplification, the Wall Street division of the Top One Percent sold too many mortgages to the lower classes that had been created by the failed ‘trickle-down’ economics of Reagan. Their inability to repay the loans both caused the crisis and drove them deeper into poverty.

American taxpayers then bailed out the banks and investment banks to the tune of $1,270 billion, but left mortgagees who had defaulted to their own devices. And the right-wing of the Republican Party ensured that the bailout was not paid for by increased taxes on the rich.

In fact, as Paul Krugman points out in today’s New York Times, “the destructive ideology that has taken over the Republican Party”, has blocked any kind of government spending at all, including social programmes for the poor and public infrastructure.

Unfortunately, given our current Government's policies I fear we might be looking at a similar outcome in Australia.

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