How to Lessen Inequality in Three Short Paragraphs

Dean BakerSince the rise in the dollar in the late 1990s, the US has had a large trade deficit, which creates a big gap in demand. This gap in demand was filled by a stock bubble at the end of the 1990s and a housing bubble in the last decade. When the housing bubble burst, there was nothing to fill the demand gap created by the trade deficit.

Since it is not politically acceptable to talk about large budget deficits, and there is little interest in work sharing and other policies to reduce supply, the economy is likely to remain well below full employment levels of output. When the economy is below full employment, workers lack the bargaining power to secure their share of productivity growth, leading to upward redistribution. Upward redistribution is also helped by stronger and longer patent and copyright protection, special tax breaks that cultivate niches for finance, and subsidies to top management at non-profits (eg universities, hospitals, and foundations) in the form of tax exempt status.

We could reverse the situation by either having the government spend more money, pushing legislation that will tighten the labor market by reducing average hours worked per worker, or by measures that will reduce the value of the dollar against other currencies, thereby reducing the trade deficit. All of these measures would boost growth and led to stronger wage growth, thereby lessening inequality.

—Dean Baker
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