Monday, 6 October 2014
Inequality is not the enemy of growth.
Not that I favour excess inequality.
Amir Sufi and Prof Atif have done useful work proving that the recent recession was much exacerbated by a slump in spending by underwater households. And from that, it seems to be currently fashionable to conclude that less inequality (i.e. less financially constrained indebted households) would have resulted in less of slump in demand during the recent recession, ergo inequality exacerbates unemployment.
Well that’s false logic. Reason is that given sufficient counter cyclical spending by government (i.e. a big enough deficit) the slump in demand by underwater households could perfectly well have been negated.
Put another way, if we returned to the inequalities of the Victorian era, there’d be nothing to prevent full employment: just bump up demand enough, and there’d be loads of jobs for butlers, chambermaids, footmen, head gardeners, under gardeners, and so on.
I have no desire to return to that era, but the point is that big inequalities do not actually prevent full employment.
Or put that another way, Mosler’s law trumps everything. Mosler’s law states that “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” See sentence in yellow at the top of Warren Mosler’s site.