The Dirty Secret of Inequality: The Middle Class

Discussions on income inequality always drive me insane.  Inequality is a serious issue, but the dirty little secret is that the wealthy aren’t the problem (and increased personal savings, not redistribution, is the answer).  The upper-middle-class (and, to some extend, the middle-middle-class) is where all the money is.  This is why President Obama is resisting Democrats like Chuck Shumer, who want to raise his 250,000-and-above limit on tax hikes to one-million-and-above.

“The wealthy” are not responsible for the distorted price structure in our economy, or its nasty effects on the poor.  The middle class is; it went into debt, created a huge trade deficit, and responded to stagnant wages (an unavoidable side effect of trade deficits) by borrowing even more (creating the housing bubble).  All of this had a nasty effect on the standard of living of the lower-middle-class and the poor, neither of which benefitted much from the national borrowing binge.

There are two camps on how to solve this problem: one is to increase the middle-class saving rate (the conservative position), possibly by privatizing Social Security; the other is to redistribute the “excess” purchasing power through taxation (the left-liberal position).  The middle-class is very powerful in most developed countries, and liberals are hesitant to discuss this in public; that’s why they scapegoat “the rich”.  Conservatives, on the other hand, have a much more positive message; why we aren’t shouting it from the rooftops is a mystery to me.  Americans may be suspicious of class warfare, but if it’s the only game in town they may go for it.

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