The Coming Liberal Argument

Here is a real effect Occupy Wall Street is having on the liberal left. They will start to blame the current bad economy explicitly on income inequality.

Here is Heather Boushey writing at the Center for American Progress:

Take, for example, the housing bubble of the 2000s. It was facilitated in no small part by exotic mortgages that were sliced and diced and sold to investors who pushed home prices to hitherto unknown heights. And when it popped, millions of American families—through no fault of their own except the decision to buy a home—were left with mortgages greater than the value of their homes. High rates of foreclosure still plague our economy.

What is less-often discussed (until recently) is the role that inequality played in making the Great Recession and the subsequent slow recovery happen in the first place. Inequality has been rising for decades for most Americans in the form of stagnating incomes for the majority and sky-rocketing incomes for those at the very top. When income stopped growing, families responded by working more and borrowing more. As consumer activist Elizabeth Warren (with her daughter Amelia Warren Tyagi) documented, American’s debts are the direct result of a hollowed out middle class. Families borrowed to make ends meet, to cover health care costs, to put a child through college, and to purchase a home in a neighborhood with good schools.

The financial sector was only too happy to oblige. Increasingly unencumbered by regulation and flush with cash, Wall Street created a variety of new ways to extend credit. Basically, America didn’t get a raise and the financial sector said, “Don’t worry, buddy, we’ll loan you the money to pay the bills.” Of course, the whole thing was unsustainable. Thus came the Great Recession and the struggle ever since among everyday Americans to make ends meet, to cover health care costs, to put a child through college, and to purchase a home in a neighborhood with good schools.,

I would advise conservatives to start paying close attention to this argument. If President Obama runs on a platform of higher federal income taxes, this is how it will be justified. I wouldn’t be surprised if at some point in 2012, a Democratic congressman blames the financial crisis directly on the Bush tax cuts.

Boushey makes this argument in reference to a lot of other literature so a proper review of the evidence is needed, but one immediate question that comes to my mind is why middle class incomes were not rising.

If it was because healthcare costs were consuming all the productivity gains the American worker was making, then that suggests that better controls for healthcare costs could have saved everyone a lot of trouble. There can be a lot of arguments as to how best to do that, but that does not sound like a story about higher income taxes for the top 1% of society.

I suspect this argument will get more developed as the election season kicks off, especially if the Democrats develop a platform and message that is strongly against income inequality.