Before the Great Recession, I would sometimes give public lectures in which I would talk about rising inequality, making the point that the concentration of income at the top had reached levels not seen since 1929. Often, someone in the audience would ask whether this meant that another depression was imminent.
Did the rise of the 1 percent (or, better yet, the 0.01 percent) cause the Lesser Depression we’re now living through? It probably contributed.
But the more important point is that inequality is a major reason the economy is still so depressed and unemployment so high. For we have responded to crisis with a mix of paralysis and confusion — both of which have a lot to do with the distorting effects of great wealth on our society.
Put it this way: If something like the financial crisis of 2008 had occurred in, say, 1971 — the year Richard Nixon declared that “I am now a Keynesian in economic policy” — Washington would probably have responded fairly effectively. There would have been a broad bipartisan consensus in favor of strong action, and there would also have been wide agreement about what kind of action was needed.
Let’s not forget that the first two years of the Obama administration saw more significant legislation passed — such as the stimulus, the health-care overhaul and the Dodd-Frank financial regulatory reforms — than any period since the mid-1960s.
But that was then. Today, Washington is marked by a combination of bitter partisanship and intellectual confusion — and both are, I would argue, largely the result of extreme income inequality.
On partisanship: The Congressional scholars Thomas Mann and Norman Ornstein have been making waves with a new book acknowledging a truth that, until now, was unmentionable in polite circles. They say our political dysfunction is largely because of the transformation of the Republican Party into an extremist force that is “dismissive of the legitimacy of its political opposition.” You can’t get cooperation to serve the national interest when one side of the divide sees no distinction between the national interest and its own partisan triumph.
So how did that happen? For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation.
And the takeover of half our political spectrum by the 0.01 percent is, I’d argue, also responsible for the degradation of our economic discourse, which has made any sensible discussion of what we should be doing impossible.
Disputes in economics used to be bounded by a shared understanding of the evidence, creating a broad range of agreement about economic policy. To take the most prominent example, Milton Friedman may have opposed fiscal activism, but he very much supported monetary activism to fight deep economic slumps, to an extent that would have put him well to the left of center in many current debates.
Now, however, the Republican Party is dominated by doctrines formerly on the political fringe. Friedman called for monetary flexibility; today, much of the G.O.P. is fanatically devoted to the gold standard. N. Gregory Mankiw of Harvard University, a Romney economic adviser, once dismissed those claiming that tax cuts pay for themselves as “charlatans and cranks”; today, that notion is very close to being official Republican doctrine.
...The real structural problem is in our political system, which has been warped and paralyzed by the power of a small, wealthy minority. And the key to economic recovery lies in finding a way to get past that minority’s malign influence.