A major political issue today is income inequality, a term I do not embrace because in a properly functioning economy there must, and in fairness, should be variations in income. What becomes problematic is when the inequality is extreme, a situation that now exists in the U.S. Higher taxation rates for the rich combined with increased salaries for those on the low end can ameliorate this problem. Conservatives are against this, arguing that taxes ought to be less burdensome on the wealthy because the more wealth they keep, the more jobs they will create. Known as trickle down economics, it does not work because it is demand that entrepreneurs respond to. Without it, there is no supply, which explains why you cannot find a retail store in Manhattan, NYC that sells lawn mowers; or why snow blowers are not sold in Honolulu, Hawaii; and just try to find an air conditioner in Point Barrow, Alaska. From another perspective, poor people cannot afford to buy much (limited demand), which hurts business (supply). The moderately wealthy can buy far more products which aids business. However, the super rich will only buy a finite amount of goods and services, so much of their wealth goes into purchasing stock in assorted businesses, which increases their personal wealth, but does nothing for business.

History proves that extreme income inequality invariably leads to economic woe, and nothing better illustrates this than the great depression of the 1930’s. From 1921 to 1929, America’s economy grew, but only a tiny percentage of people saw a growth in their income. Such conditions have existed in many periods prior to that era, and in all of them, the lack of sufficient demand made their economies chronically shaky. Inevitably the economy would go into a sudden slide known as a panic, which was set off by any number of things. A poor harvest meant that farmers could not afford to buy goods. A foreign war might hamper trade. In 1929, the panic was set off by the stock market bubble. Since in those pre-regulation days, stocks could be bought by putting down a small fraction of their cost (margin buying), many who should have been acquiring consumer goods were, in the hope of getting rich, playing the stock market, which worsened the problem of insufficient demand for what entrepreneurs produced. By October, 1929, the unrealistic rise in stock values was unnerving many stock owners which led to a wave of sell-offs, causing stocks to lose value, leading to panic selling. The bursting of the stock market bubble impoverished millions of stock market investors, who now could no longer afford to buy what businesses produced. The resulting widespread loss of demand for goods and services caused factories to produce less, leading to worker lay offs, and jobless people could not afford to buy much (reduced demand). Unemployed withdrew money from their savings banks, causing banks to run out of cash reserves, i.e. there were widespread bankruptcies. Surviving banks limited loans only to the safest, most well established businesses, thus hampering economic expansion. It was a vicious cycle that only worsened, so that by late 1932, unemployment was about thirty percent.

Liberal thinkers suggested that the government ought to create public sector jobs which not only would build needed infrastructure, but would also give workers money so that they could resume buying products, thus reviving the economy. Unfortunately, conservatives such as President Herbert Hoover believed that this would take money away from private businessmen, discouraging business expansion. To reassure the public, Hoover described the economic problem as being like a little depression that would soon right itself. Hence the coining of the term depression, which, ironically, came to mean economic collapse. Under Franklin D. Roosevelt’s New Deal, public sector jobs were created, and the economy improved, with unemployment dropping to nine percent by 1936. Unfortunately, the following year, government spending was reduced with the consequence that the jobless rate shot up to sixteen percent. It was the massive government spending to fight the Second World War that finally got America out of the financial doldrums. The economic expansion which began then, continued for decades because of several factors. Strong labor unions brought higher wages (increased demand). There was social security for retirees. The federal deposit insurance corporation protected savings banks from bankruptcy. The securities and exchange commission helped to prevent corruption in finance. Unfortunately, after 1980, tax policies that favored the rich led to an excessive concentration of wealth. Then, lax government enforcement of housing market regulations led to a Ponzi like housing market scheme that created the bubble which, when it burst in 2008. brought economic catastrophe.

Just as people who believe that an entire economy controlled by the government (communist) are spewing nonsense, so those on the right who think that the government should not play a vital role in our economy are also spewing nonsense.