I still don't understand why some people conflate discussions on "income inequality" with the recession. They are entirely different issues.Having everyone earning equal incomes is immaterial to whether aggregate demand is at full employment levels. Australia has one of the highest levels of income inequality in the First World by RP10% measure (it is at nearly 15 times), but it weathered the recession smoothly. The stimulus in Australia did not require an incomes policy to be successful.Furthermore, James Galbraith often seems to speak from both sides of the mouth when he supports the idea that government can and does spend as much money as it wants and when he says that the Bush tax rate reductions were wrong. Why should the tax rate reductions matter when government can and does spend as much as it wants?Of course, his concern is some people earning more than others. But if so, why does it matter or why is it a prime concern of our times? Solving a recession does not require a "5 times" measure on the RP10% scale.
Yes, it is perfectly true that Australia has a high level of income inequality, but weathered the recession smoothly.But I think we have had this discussion before.Greater income equality means more money spent on goods and services - as opposed to greater income inequality in which the rich pump their money into real and financial asset markets or primary commodity speculation (a primary source of inflation), subtracting from AD.Even by looking at the marginal propensity to consume aspect, there is an economic justification for greater income equality.
Doesn't the work of Simon Kuznets show that average propensity to consume remains constant in the long run irrespective of rise and fall in incomes?http://www.jstor.org/pss/1910625Marginal propensity to consume explains spending/saving differences in a very short time frame. In the longer run, Kuznets believed savings rates were constant across all income levels. In US, he found they were always 12-13%.