WaPo corporatist Steven Pearlstein is asking to be pilloried by fellow Villagers for "class warfare"

"Political candidates may not be talking about income inequality during this election, but it is the unspoken issue that underlies all the others. Without a sense of shared prosperity, there can be no prosperity. And given the realities of global capitalism, with its booms and busts and winner-take-all dynamic, that will require more government involvement in the economy, not less."

-- Washington Post financial columnist Steven Pearlstein, in Wednesday's "The costs of rising economic inequality"

by Ken

Maybe I'm doing him an injustice, but whenever I read Steven Pearlstein, he seems a safely predictable Village-corporatist stooge. Which is why Wednesday's column came as a shock.

He got off to kind of a shaky start: "Although much of the Republicans' 'Pledge to America' is given over to a discussion of economic issues, there is one topic that is never mentioned: the dramatic rise in income inequality." True enough, but immediately you have to wonder whether he's been paying attention to the last several decades' political discourse, all the more so when he continues, "As with global warming, Republicans seem to have decided that the best way to deal with this fundamental challenge is to deny it exists."

"Seem?" Republicans "seem" to have decided that the best way to deal with these fundamental challenges is to deny they exist? What would they have to do to persuade Mr. P that they're actually denying, as a matter of core principle, that such problems exist?

(1) With regard to global warming, how explicit do right-wingers have to be in their insistence that global warming doesn't exist, or at least isn't manmade, or hasn't been shown to pose any problem (and may even bring benefits like better beach weather and longer crop-growing seasons) for them to cross Mr. P's "seem to deny" threshhold? To put it another way, has anyone discovered any length to which the Republican climate-change deniers will not go to deny the reality?

(2) And with regard to economic inequality, has Mr. P truly noticed that anytime anyone so much as hints that it might be some sort of issue, the Right-Wing Noise Machine can be counted on to screech in unison:

"Class warfare!"

This is meant to end any discussion, and it almost invariably does, at least in the infotainment news media. In our beloved capital Village on the Potomac, there is truly no such thing as income inequality. Unless, of course, you're referring to the kind that really matters: the frustrating gap that keeps the merely rich out of the ranks of the super-rich. (There's also the gap that separates the super-rich from the obscenely rich, but that's even less discussed.)

Okay, so Steve is a little shaky about the politics of the subject. On the facts of income inequality, well, he's got some dandy ones.

If you asked Americans how much of the nation's pretax income goes to the top 10 percent of households, it is unlikely they would come anywhere close to 50 percent, which is where it was just before the bubble burst in 2007. That's according to groundbreaking research by economists Thomas Piketty, of the Paris School of Economics, and Emmanuel Saez, of the University of California at Berkeley, who last week won one of this year's MacArthur Foundation "genius" grants.

It wasn't always that way. From World War II until 1976, considered by many as the "golden years" for the U.S. economy, the top 10 percent of the population took home less than a third of the income generated by the private economy. But since then, according to Saez and Piketty, virtually all of the benefits of economic growth have gone to households that, in today's terms, earn more than $110,000 a year.

"By 2007," Mr. P points out, "the top 1 percent of households took home 23 percent of the national income after a 15-year run in which they captured more than half -- yes, you read that right, more than half -- of the country's economic growth."

He cites a number of "suspects," and offers the unsurprising conclusion that they're all to blame:

* Globalization ("in the form of increased flows of people, goods and capital across borders")

* Technological change ("which has skewed the demand for labor in favor of workers with higher education without a corresponding increase in the supply of such workers")

* "What economists call 'institutional' changes" -- "the decline of unions, industry deregulation and the increased power of financial markets over corporate behavior" ("Over time, more industries have developed the kind of superstar pay structures that were long associated with Hollywood and professional sports")

* And his "favorite culprit," "changing social norms" -- "around the issue of how much inequality is socially acceptable"

Mr. P sets out a good case for why this all matters:

There are moral and political reasons for caring about this dramatic skewing of income, which in the real world leads to a similar skewing of opportunity, social standing and political power. But there is also an important economic reason: Too much inequality, just like too little, appears to reduce global competitiveness and long-term growth, at least in developed countries like ours.

We know from recent experience, for example, that financial bubbles reduce equality by siphoning off a disproportionate share of national income to Wall Street's highly-paid bankers and traders. What may be less obvious, but not less important, is that the causality also works the other way: Too much inequality can lead to financial bubbles.

The liberal version of this argument comes from former Labor secretary Robert Reich in his new book, "Aftershock." Because so much of the nation's income is siphoned off to the super-rich, Reich says, a struggling middle class trying to maintain its standard of living had no choice but to take on more and more debt. I have some problem with the argument that the middle class had no choice, but it's certainly true that the middle class and the economy as a whole would be in better shape today if households weren't burdened with so much debt.

The more conservative version of this argument comes from University of Chicago economist Raghuram Rajan. In his new book, "Fault Lines," Rajan argues that in order to respond to the stagnant incomes of their constituents, politicians took a number of steps to keep the "American Dream" within reach, including subsidization of home mortgages and college loans. He might have added that politicians also were quick to cut taxes for the middle class even when it meant running up the national debt to pay for popular entitlement programs and government services.

Remember, Raghuram Rajan's argument is the more conservative one! And this from a card-carrying Chicago-school economist -- Chicago-school godfather Milton Friedman must be rolling in his grave.

SIDEBAR: WHAT WOULD UNCLE MILTIE
HAVE TO SAY ABOUT RAGHURAM?

But then, as The New Yorker's John Cassidy noted in his fascinating post-meltdown post mortem on the Chicago-school economists, which I wrote about in January (unfortunately, only an abstract was made available free online), Rajan was already a known heretic among his Chicago brethren in the run-up to the meltdown.

At a conference organized by the Fed in 2005, he said that deregulation, trading in complex financial products, and the proliferation of bonuses for traders had greatly increased the risk of a blowup. Senior Fed officials and other prominent economists dismissed his concerns. Lawrence Summers said that Rajan's critical tone supported "a wide variety of misguided policy impulses."

As I wrote in January, Rajan, who was chief economist of the International Monetary Fund from 2003 to 2006, calls what happened "a systemic breakdown" and insists that "we need to look more broadly at why it happened." In the book he was working on at the time, he argues "that the initial causes of the breakdown were stagnant wages and rising inequality," which created "an urgent demand for credit" among middle-class households "lagging behind the cost of living."

"Are you hearing this?" I wrote back then. "Once upon a time Uncle Miltie would have had you run out of Chicago for mouthing left-wing claptrap like this."

To return to Mr. Pearlstein, he points to "trillions of dollars being spent and invested" in "spectacularly unproductive" ways.

In recent decades, the rich have used their winnings to bid up the prices of artwork and fancy cars, the tuition at prestigious private schools and universities, the services of celebrity hairdressers and interior decorators, and real estate in fashionable enclaves from Park City to Park Avenue. And what wasn't misspent was largely misinvested in hedge funds and private equity vehicles that played a pivotal role in inflating a series of speculative financial bubbles, from the junk bond bubble of the '80s to the tech and telecom bubble of the '90s to the credit bubble of the past decade.

And he has an interesting argument concerning "the biggest problem with runaway inequality":

It undermines the unity of purpose necessary for any firm, or any nation, to thrive. People don't work hard, take risks and make sacrifices if they think the rewards will all flow to others. Conservative Republicans use this argument all the time in trying to justify lower tax rates for wealthy earners and investors, but they chose to ignore it when it comes to the incomes of everyone else. [Emphasis added.]

He insists there's a correlation between "polarization of income distribution in the United States" and "polarization of the political process":

Just as income inequality has eroded any sense that we are all in this together, it has also eroded the political consensus necessary for effective government. There can be no better proof of that proposition than the current election cycle, in which the last of the moderates are being driven from the political process and the most likely prospect is for years of ideological warfare and political gridlock.

I don't know where he gets the idea that moderates have been of much use in thinking about income inequality. If anything, you'd think the issue might be of more interest to all those folks in the famous middle now that the oligarchy of their financial betters has made them modest victims rather than, as before, beneficiaries of economic maldistribution. Still, it's hard to quarrel with his conclusion, which is the paragraph I've quoted at the top of this post. Here it is again:

Political candidates may not be talking about income inequality during this election, but it is the unspoken issue that underlies all the others. Without a sense of shared prosperity, there can be no prosperity. And given the realities of global capitalism, with its booms and busts and winner-take-all dynamic, that will require more government involvement in the economy, not less.

From a down-the-middle Villager like Mr. P, this sounds positively Marxist. You have to wonder how he will dare to show his face at Village cocktail parties.

His best hope is probably that the discussable (and, in policy terms, actionable) level of income inequality is likely to remain, at least for the foreseeable future, approximately where it was before he wrote this piece. Which is to say, out of bounds, on the ground of --

"Class warfare!"

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