Particularly interesting is the "savings glut" argument. Rich are spending smaller part of their income. As a result, income equality leads to situation where income flows into investments or property values and demand starts to decrease after a while, leading to smaller return for the investments.
Direct taxation is fought, laissez-faire salary negotiation has failed for the lower end - people in the low-end labor market don't have enough leverage vs employers. I suspect we're going to need new financial constructs to help the wealthy have a place to invest their wealth constructively, or suffer larger and larger recessions.
I've always wondered if a tax incentive for a salary expense writeoff at some leveraged ratio would be useful. e.g. you get to write off 125% of the expenses of paying a salary instead of 100%. A better ratio for better paying jobs at some range around the middle class (if you target lower incomes then you just end up incentivizing low salary jobs). It's not ideal, but could maybe appeal to both sides of the aisle. Of course with the recent tax cuts, this would be added deficit - but maybe in the context of reraising taxes to get back to balanced budgets it might be interesting.
In terms of smaller returns, you can see this with cell phone manufacturing. So much capital is on the sidelines that when it sees a chance to turn a profit, capital floods in, a massive infrastructure for building cell phones springs up, and returns shrink. The only exception is Apple, for a variety of reasons including that the initial iPhone was a product of high quality and convenience compared to its competitors at the time.
> Indeed, the empirical literature on the causal effect of inequality on economic growth is largely inconclusive.
It's tempting to think that income inequality drives demand down and causes less economic growth. I would actually agree, yet the scientific evidence might be missing.
IMO, we should put limits in inequality, not because of what we think it might do to the economy, but because it's the decent thing to do! Because we're nice human beings :)
Agreed! In the end it's a question of values.
maximize happiness in the universe.
(included some other countries to compare, Saudi Arabia is also an interesting one but it messes up the graph.)
To summarize, a "savings glut", they claim, is what happens when wealthy people do not spend their money, causing an increase in bank deposits, causing a drop in interest rates, causing the central bank to have less leverage in managing the economy. While in a sans-central bank economy interest rates may work that way, the world's economies are managed by central banks who, more or less, determine what the interest rates will be. That is to say, current record-low interest rates have very little to do with savings from the wealthy, and are mostly tied to the tens of trillions of dollars injected into the economy in recent years by the central banks.