Yesterday I read an opinion in the The Wall Street Journal entitled The Real Cause of Income Inequality by Phil Gramm and Steve McMillin. Mr. Gramm was a Republican senator from Texas, and Mr. McMillin was the deputy director of the Office of Management and Budget for President G.W. Bush. Now they both work for US Policy Metrics, a boutique advisory firm for hedge funds and asset management firms.

Notably, Mr. Gram is the first name on a particularly infamous piece of legislation: the Gramm-Leach-Bliley Act. Signed by President Clinton in 1999, it let banks greatly expand risk-taking, which contributed significantly to the current global financial crisis.
Despite the article's title, the authors never discuss the cause of income inequality. They just defend it using outdated economic platitudes. And for added fun, they blow a little smoke in our faces about taxation. The essence of their argument is:
  1. Inequality is a healthy by-product of success
  2. We all benefit from success
  3. US taxes inappropriately punish people who are successful

The true cause of inequality is something first-graders can easily understand: a few people get a lot more money than everyone else. This is the real cause of income inequality. It's pretty basic. But I guess fundamentals like these are of no use to hedge funds and asset management firms.

Imagine a school teacher who wanted to demonstrate the ludicrous nature of the Gramm / McMillin logic. Let's say the teacher held a race on an elementary school playground. The teacher gave the winner $550 in a big, clear box full of one dollar bills for everyone to see, and then handed $1 to everyone else. How would the children react? They would scream the outcome was unfair. And what would their parents say? I suspect they would see to it that the teacher who devised this little demonstration of extreme American capitalism was quickly fired.

The teacher's defense could be that the top .01% of America earned 550 times more than Middle America in 2008. (See Part 2 of Deep Economics: Disparity.) He could rightly assert that the wealthy few routinely give each other outsized rewards, and that he should be rewarded, not punished, for teaching young students the American way. But this justification would not save the teacher, would it?

Apparently hedge funds and asset management firms greatly appreciate the Gramm / McMillin logic. But it doesn't serve the general welfare. And it doesn't follow the "play nice on the playground" rule, either.



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