How to Bring Down Economic Inequality

    As I said in earlier posts, I'm currently reading James Galbraith's "Created Unequal" which I highly recommend for those who really want to get to the bottom of our declining standard of living that we have seen over the last 30 years.

    He does a good job of showing what does-and doesn't-effect economic inequality. For example, while affirmative action may-and I believe is-a positive social policy that engenders more diversity it does not by definition decrease economic inequality as such. What it does is give us more diversity at the top of the economic pyramid.

   This is clearly borne out by the high levels of unemployment we have continued to see in the African-American community even as there has been a growing  black economic elite. It's important to realize that while affirmative action can be a positive social policy for blacks and women, it is not going to do much about underlying economic inequality, either within the demographic of blacks and women respectively, or between blacks and whites or women and men. Inequality numbers come down for these groups really in the same way they come down for white males with modest or little income: full employment policies.

   For as simple as it is, what brings down inequality more than anything, it turns out is low unemployment. This really is simple and really when you think about it intuitive. While I'm just laying the punch line out for you here, Galbraith got here by painstakingly factoring in many different variables that might be expected to affect inequality-the US dollar, the amount of global trade, interest rates, inflation, etc. What emerged is that there is a 77 percent level of correlation-in economics that's very high-between unemployment and inequality.

   What's important to realize is that if it is this simple-simply bring down unemployment, follow full employment policies-this has not been our policy in recent years. Galbraith is very clear on when we gave up on full employment policies-1970. He dates this as the time when the Federal Reserve moved from a focus on full employment to low inflation as it's mandate. With the recent crisis, some at the Fed have been talking about possibly declaring that while 2 percent inflation is the long term goal, more important for right now is their full employment mandate and that maybe we can tolerate higher inflation until unemployment goes beneath 7 percent. If the Fed does anything like this it would mark a departure from the last 40 years of monetary policy.