08 April 2009

Too Big to Fail?

Too big to fail is a phrase being tossed around quite a bit lately; AIG, Citi, and the like. Too big to fail has another meaning: when income/wealth get concentrated into too few hands, hiccups in the economy get magnified as well. All economic activity falters.One of the toxic side effects of income concentration is state governments, as New York and Connecticut particularly, find income tax receipts get badly hammered, since such taxes have come to be dependent on these fewer increasingly richer folks. Said fewer folks gulp ever larger proportions of the income stream, they represent more of the tax base. How then to preserve both services and incomes?

It has been argued that the last bastion of the economy will be state governments, to the extent that they provide both equity in services such as education (to offset disparity in property values) and employment when private sector employment tanks. Were it not for the drastic concentration of income, that 1% eating 22%, the loss of jobs from the corrupt financial services sector would be tolerable. The loss of taxes from these folks would not amount to such a large chunk of state revenue; the base would consist of larger numbers of the employed.

So this 1% complain that they shoulder too much of the tax burden, while quietly ignoring the fact that they have been the sole recipient of economic growth. They stole the money fair and square, so far as they are concerned.

Had median income kept pace with, and income distribution remained at, say, 1980 levels this depression would not likely have happened.

Here's why.

Just as Adam Smith (the original) fantasized an economy where no one (or few together) actor could influence the "market", we find ourselves now with a situation where wherever we look, there is an 800 pound gorilla controlling markets.

What gets ignored, both by the Angry and the Get-Over-It sets, is a fundamental understanding of the problem. To wit: recessions (and depressions, going back to at least 1873, in other words, the industrial era) are the result of runups of income/wealth inequality. Check the history books.

Same thing has happened here, and as happened in the past, the proximate trigger is banking failure. But, this trigger was pulled by the sudden disappearance of income. Since Reagan, median income has fallen; yet the data show growth. We now know that the top 1% suck up about 22% of income. The middle class, what there was left of it, got along through the Bush years by burning up all that pyramid scheme equity which miraculously (as manna from heaven; in keeping with right-wing neo-Christian ideology) appeared in housing. That in turn was fueled by the game playing of the mortgage industry.

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