Wealth Inequality from a Macroeconomics Perspective
Introduction
Boushey reports in Unbound that the very richest householdsthe top 1 percentsave 51 percent of their income, while those in the bottom 20 percent save just 1 percent.[footnoteRef:2] The income gap between the top 1 percent and the 99 percent in the US has only increased since the Great Financial Crisis of 2008, when the Federal Reserve responded to the bursting housing bubble with three rounds of unconventional monetary policy. As Pew Research has shown, economic inequality, whether measured through the gaps in income or wealth between richer and poorer households, continues to widen.[footnoteRef:3] The widening wealth inequality in America is directly related to Keynesian economics, unconventional monetary policy, and central banking intervention, which benefits the top 1 percent to the detriment of the rest of the population. This subject is important because if it goes unaddressed, the vast majority of the US population will end up as little more than serfs under the 1 percent. This paper will address the issue of wealth inequality by looking at the gap between the 1 percent and the 99 percent, explaining how Keynesian economics and quantitative easing (unconventional monetary policy) have exacerbated that gap over the past decade plus since the Great Financial Crisis of 2008. [2: Heather Boushey, Unbound: How Inequality Constricts Our Economy and What We Can Do About It. (Harvard University Press, 2019), 144.] [3: Juliana Menasce Horowitz, Ruth Igielnik and Rakesh Kochhar. Trends in Income and Wealth Inequality. Pew Research, 2020. https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/]
Research
Classical economic theory posits that free markets are balanced by the law of supply and demand. This was the basis of Adam Smiths view that economic order and balance could be maintained so long as nations did not attempt to engage in a zero sum game. Keynesian theory developed in response to perceived market irregularities and is based on the idea that markets will not self-correct when problems because markets are inherently imperfect. During a recession, for example, wage reductions mean earners have less to spend and savers will keep money out of the economy if the interest rate is high enough. Keynes therefore suggested that fiscal policy (government spending) and monetary policy (control of the money supply by the central bankthe Federal Reserve in the US) should work strategically to counter business cycles and ensure balance in the economy. This idea necessitated, however, that the free market economy be transitioned into a command economy. Keynes himself lost faith in the power of his monetary transmission mechanism, and had moved his preference towards fiscal policy, but as shall be shown here, fiscal responsibility has not been a hallmark of the US government since 2008, and monetary policy has been used to support the markets.[footnoteRef:4] [4: Marc Lavoie and Brett Fiebiger. "Unconventional monetary policies, with a focus on quantitative easing."European Journal of Economics and Economic Policies: Intervention15, no. 2 (2018), 141.]
Wealth Gap
The wealth gap in the US has widened as a result of the concentration of wealth in the hands of a few, the fact that inflation has occurred while wages have not risen enough for the working class, and that the wealthy 1 percent have amassed significant political power, which limits the potential for the rest of the population to prompt legislation that would address issues, such as monopsony and monopoly by the 1 percent.[footnoteRef:5] The chart below shows the extent to which the income gap has widened in recent years. [5: Heather Boushey, Unbound: How Inequality Constricts Our Economy and What We Can Do About It. (Harvard University Press, 2019), 195.]
[footnoteRef:6] [6: Growth of Family Income. Source: Andrea Witte, http://www.connectthedots.usa.com/.]
As can...
…still struggling to rebound from the 2020 lockdowns. The longer QE goes on, and the longer rates are suppressed (in accordance with Keynesian theory), the worse it gets for the 99 percent. Fed Chair Powell says that inflation is transitory, but anyone can see that the value of the dollar has dropped more than 90 percent since the creation of the Federal Reserve. Inflation was not felt so long as everyones income was growing together in the post-war years.However, when credit tightened and jobs were offshored, the working class suddenly saw its ability to grow constrained. The allure of the American dream (everyone being a homeowner) led to many Americans taking advantage of easy credit during the housing bubble yearsbut that bubble burst when credit once more tightened. Today, housing prices have risen as investors have sought to put their money into tangible assets outside of equities. The middle class is increasingly being priced out of markets. So long as production remains overseas and the 1 percent is allowed to maintain its monopoly and monopsony in the marketplace, there will be no end to the widening wealth gap in America. That is the main take away from this research.
Bibliography
Boushey, Heather. Unbound: How Inequality Constricts Our Economy and What We
Can Do About It. Harvard University Press, 2019.
Lavoie, Marc, and Brett Fiebiger. "Unconventional monetary policies, with a focus on
quantitative easing."European Journal of Economics and Economic Policies: Intervention15, no. 2 (2018): 139-146.
Mandel, M. The Real Cost of Offshoring.Business Week,18(June 2007), 29-34.
Menasce Horowitz, Juliana, Ruth Igielnik and Rakesh Kochhar. Trends in Income and
Wealth Inequaity. Pew Research, 2020. https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/
Spiro, D. E. The Hidden Hand of American Hegemony: Petrodollar Recycling and
International Markets. Cornell University Press, 1999.
Sraders, Anne and Lance Lambert, Nearly 100,000 establishments that temporarily shut
down due to the pandemic are now out of business, Fortune, 2020.…
Bibliography
Boushey, Heather. Unbound: How Inequality Constricts Our Economy and What WeCan Do About It. Harvard University Press, 2019.
Boushey provides insight into the problem of wealth inequality by examining the data on the accumulation of wealth and the role that monopoly and monopsony play in the problem. This is a good source for evaluating the issues behind wealth gap.
Lavoie, Marc, and Brett Fiebiger. "Unconventional monetary policies, with a focus onquantitative easing." European Journal of Economics and Economic Policies: Intervention 15, no. 2 (2018): 139-146.
This source shows how QE has become a problem in the sense of widening the wealth gap. It shows that QE favors those who have money to invest.
Mandel, M. “The Real Cost of Offshoring.” Business Week, 18(June 2007), 29-34.
This source gets to the heart of the problem of production and how offshoring has hurt the working class in the US. It shows that production jobs are lost, which changes the economy.
Menasce Horowitz, Juliana, Ruth Igielnik and Rakesh Kochhar. “Trends in Income andWealth Inequality.” Pew Research, 2020. https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/
This source shows that wealth inequality and income inequality have reached a point where the top classes are benefitting from monetary and fiscal policy while the lower classes are hurt.
Spiro, D. E. The Hidden Hand of American Hegemony: Petrodollar Recycling andInternational Markets. Cornell University Press, 1999.
This source explains the role that the Petrodollar agreement played in keeping USD as a reserve currency. This is important for understanding why USD has survived the closing of the gold window.
Sraders, Anne and Lance Lambert, “Nearly 100,000 establishments that temporarily shutdown due to the pandemic are now out of business,” Fortune, 2020. https://fortune.com/2020/09/28/covid-buisnesses-shut-down-closed/
This source shows that the lockdowns have hurt small business owners. These are jobs that are not coming back. Meanwhile, big businesses have been hurt far less and have access to capital that small businesses do not.
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