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OWS has taught us something useful. People are generally open to the idea that things aren't fair, and they haven't been for a long time.

Right now, that unfairness is often expressed as income inequality, but the sum of 30 years of growing income inequality is severe wealth inequality. With the collapse of the economy and the spike in unemployment and underemployment, it's been made much more severe, especially when you consider houses underwater and ballooning student loan debt.

This morning, Paul Krugman linked to a blog about how sovereign debt is eliminated: by default, taxation, or printing money (inflation). Each of these choices picks winners and losers. Default harms bondholders, taxation (depending on progressivity) harms citizens, and inflation harms rentiers (by reducing the real value of borrowed money).

This got me thinking. How do we solve the problem of wealth inequality? Clearly, there's no way to directly tax wealth in this country. A law that requires the wealthy to deliver 10% of their net worth to the government would never work here. In fact, most of our legislation appears to work in the opposite direction.

But there's more than one way to skin this cat. I believe that the simplest way to redistribute wealth and right the economy today is to speed the deleveraging of middle-class debt (mortgages and student loans, primarily). Like with sovereign debt, there are multiple ways to relieve private debt.

One method is inflation. During the post-war period of the late ‘40s and early ‘50s, US inflation ran about 10% or 15%. That rate of real inflation, if it manifested across all dollar-denominated assets and cash flows, would increase wages, prices, stocks, commodities. But it would not affect debt. It's a blunt instrument, and it has some serious affects. But over the course of 5 or 10 years, it would shift a portion of wealth from bondholders (banks, bankers, stockholders) to individual homeowners and taxpayers.

Another method is a partial or total default. We are doing it now, but in the most painful way possible. Individual foreclosures are resetting home prices and debt, but it's happening one destroyed family at a time. And, of course, you can't escape student loan debt, even through bankruptcy. But a massive program to reduce housing and student-loan debt would reset the housing market, free up consumer dollars, awaken the construction industry. The bill, again, would be paid by the banks, their bondholders, and stockholders.

There’s a moral

Debt forgiveness is not unprecedented. This has happened for centuries, and it happens frequently when the debts are so high (think "Greece") that an uncontrolled default would cause havoc. We need to consider this approach for smaller loans on a much broader scale.

Income redistribution will be hard to do. Republicans are working studiously to lower, not raise, the progressivity of the tax code. But wealth distribution, under the right name, might actually be achievable, and it could improve the economies of lower- and middle-class households at the same time that it could heal the national economy.

Originally posted to dsmetis on Thu Nov 17, 2011 at 07:51 PM PST.

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Comment Preferences

  •  We Already Solved This Problem. (0+ / 0-)

    And within experimental error, every element of it was passed by the Democratic Party and fought by the Republican Party.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Thu Nov 17, 2011 at 08:08:10 PM PST

  •  I heard on the radio the "financial markets" (0+ / 0-)

    are demanding yet greater austerity measures in Europe (and by extension here).

    Who the hell elected the financial markets?
    Not the Greeks.
    Not the Irish.
    Not US voters.

    Their authority is not legitimate.

    LBJ & Lady Bird, Sully Sullenberger, Molly Ivins, Barbara Jordan, Ann Richards, Drew Brees: Texas is No Bush League! -7.50,-5.59

    by BlackSheep1 on Thu Nov 17, 2011 at 09:46:10 PM PST

    •  It's not that simple. (0+ / 0-)

      When the people of a state, or a country, democratically elect officials who borrow money in order to balance the budget, that money is being borrowed (albeit indirectly) by the citizens of that state. If the state defaults, there are repercussions. They may not be able to borrow again for a while, which is a form of austerity. In the case of Greece, you may lose some of your EU status and other fun stuff.

      The reason that the crackdown is so severe is that the Greeks borrowed so much money that it would trigger a chain of bankruptcies if it were to default (same with Italy). Also, the feeling is that if countries are not punished enough for borrowing too much and then defaulting, others will follow and choose to default. Default needs to be bad for a financial system to function, and financial systems, in general, are responsible for many progressive achievements.

      •  yet there's something like 4x the money ever (0+ / 0-)

        in current debt.

        Something's fishy here, and BoA/Chase/ Goldman-Sachs and their brethren atop the world are a big part of the stink.

        LBJ & Lady Bird, Sully Sullenberger, Molly Ivins, Barbara Jordan, Ann Richards, Drew Brees: Texas is No Bush League! -7.50,-5.59

        by BlackSheep1 on Thu Nov 17, 2011 at 10:29:09 PM PST

        [ Parent ]

  •  default is happening, however (0+ / 0-)

    structural changes to our political system is absolutely necessary....

    and banking, and education, and, and, and

    The goal is not to bring your adversaries to their knees but to their senses. -- Mahatma Gandhi

    by Mindmover on Thu Nov 17, 2011 at 10:12:10 PM PST

  •  Why do diaries like this never address (0+ / 0-)

    supply, demand, and prices?  How can they be taken seriously if they don't?

    •  Don't take it seriously, then ... or ... (0+ / 0-)

      How about this? I posted this because it's what I was thinking about. I don't practice economics, but as a citizen I'm trying to pose an approach, a solution, find out what people think, learn from the dialog.

      This recession is a demand crisis, as far as I can tell. The demand problem is caused because consumers are massively deleveraging. Government stimulus should be the solution, but it's not happening. My thought was to try to speed up the deleveraging process, which should reawaken demand.

      Please tell me where I have fallen short.

      •  Well, (0+ / 0-)

        it's not clear to me which you're trying to equalize, wealth or income. They are not the same thing. That's why there are Balance Sheets (for wealth), and Income Statements (for income).  Only one number from the Income Statement is transferred to the Balance Sheet for any given accounting period -- Net Income (the algebraic sum of Revenue (-/credits) and Operating Expenses (+/debits)). Operating expenses don't include debt payments, by the way.

        Given the above, your menu for wealth redistribution becomes some combination of:

        For the "Poor"                               For the "Rich"
        --Increase their Cash                     --Decrease their Cash
        --Increase their Tangible Assets      --Decrease their Tangible Assets
        --Increase money owed them         --Decrease money owed them
        --Decrease their short term debt    --Increase their short term debt
        --Decrease their long term debt      --Increase their long term debt
        --Increase their Net Income            --Decrease their Net Income

        This is a sample balance sheet for a company.  A personal Balance sheet would use slightly different account names, but the principle's the same: ASSETS = LIABILITIES + CAPITAL.  There are many more nuances, but perhaps you can glimpse the complexity beyond the slogans.

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