The economy is suffering from the effects of neofeudalism. The economy has turned into a winner-take-all lottery where wealth concentrates among a few winners, and labor has declined in value due to technological changes, international competition, and government policy. Wealthy individuals and large corporations control the government, and the resulting deregulation has allowed them to exploit workers and the commons to concentrate their wealth even further. Economic inequality has soared to new heights reminiscent of the Gilded Age.
In American history, the "Gilded Age" refers to major growth in population in the U.S. and extravagant displays of wealth and excess of America's upper-class during the post-Civil War and post-Reconstruction era, from the 1870s to 1900. The wealth polarization derived from industrial and population expansion.
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The end of the Gilded Age coincided with the Panic of 1893, a deep depression. The depression lasted until 1897 and marked a major political realignment in the election of 1896.
A severe downturn is inevitable, just like the previous times inequality reached these levels (1929 and 1893). The only way to fix the economic problems we're about to experience is to reduce inequality--it is a moral imperative, in fact. From a utilitarian perspective, we want a society to produce the most good for the most people. Are we achieving anywhere near that by allowing Paris Hilton to live in opulence on inherited wealth while children die due to lack of health insurance?
Economic inequality is the focus of Paul Krugman's new book, Conscience of a Liberal. His thesis is that the great Middle Class society was created and is now being destroyed by government policies--America's great Middle Class was not an inevitable consequence of economics.
It's time for a New New Deal. It's time to raise taxes on the wealthy through a wealth tax on the very wealthy, a land value tax, and/or significantly increased top marginal income tax rates. With the additional tax revenue we can provide everyone in this country with health insurance, pay down some of the national debt, employ people in improving the country's infrastructure, and even directly redistribute some wealth. The economy can be turned around by creating policies that help 99% of Americans rather than just the top 1%.
Some of you will argue, "but that's socialism!". I don't care--I'm a utilitarian. Capitalism is wonderful in many ways, but unchecked capitalism inevitably results in feudalism as wealth concentrates. This is not about discarding capitalism--it's about improving upon capitalism.
Incentives to work and produce are of tremendous importance, but that does not mean that we need to have hedge fund managers making $300M/year to incentivize them. Money isn't everything, and people like that will be happy to do the same work for $3M/year for the status, prestige, and sense of accomplishment. Studies show that once a person is at a livable level of income (ie about 35k/year), happiness is correlated with a person's income relative to their peers rather than to their absolute level of income. Even if taxing the wealthy more did in fact reduce the overall GDP slightly, we would more than make up for that in utility through a more equitable distribution of wealth.