"Inequality is bad for growth, stability and efficiency.
Income inequality is in general not bad for growth, stability, or efficiency. Sure, extreme income inequality would be bad for those reasons, but the US is nowhere near those levels.
Inequality peaked both before the Great Depression and before the Great Recession, and it's not an accident.
That's not surprising. It is the wealthiest who invest heavily, so a market crash causes them to lose more. The peak is a symptom, not a cause.
So basically, when we have a lot of inequality, demand goes down. … All this inequality was offset by creating a bubble. The bubble allowed people to consume more. Now we have the inequality but we don't have a bubble, and that means that we will have persistent, weak demand, and therefore unless we create another bubble it's going to be very difficult for us to get back to full employment.
Demand does not go down when you have inequality. People who make more consume more. Demand might be restructured, because people who make more demand different things than those who don't, but it doesn't just go down because of income inequality.
And I'm not sure where you're going with the bubble argument. Income inequality is income inequality. Just because there was a bubble, doesn't mean that the reported income inequality was somehow an exaggeration of the actual income inequality.
Also, we don't want a bubble. Bubbles are artificial inflationary events that cause far more harm than good. And full employment has nothing to do with bubbles. Full employment occurs when the perceived value of labor is equal to the market value of labor. Normally, the perceived value of labor is higher than the market value of labor, which is why we have unemployment.
A lot of the inequality that we have in the United States is created by distortions – excessive financial sector, monopolies like Microsoft … giving the oil companies, mining companies resources at a discount. … These things distort the economy, while they create wealth at the top. So it's not wealth creation – it's wealth redistribution, which makes the size of the pie smaller. ...
You're forgetting the biggest player in these distortions: the government. Through its complicated tax policy, the government can pick winners and losers, incentivizing and disincentivizing activities. Government bailouts and stimulus money is used to prop up companies, who but for the assistance would fail, and ultimately that money helps prop up inefficiencies inherent to the system.
"Redistributing the tax burden can do more to promote growth than lowering taxes across the board. The reason is that lowering taxes for everyone gives benefits -- needlessly -- to firms who have no plans to invest, tax cut or not. From an incentive point of view, that's wasteful. Money was spent that did nothing to generate investment. Had the money been used elsewhere, e.g. to promote investment among firms that might actually respond, then we would get more growth per dollar of tax cuts ("bang for the buck" ought to be just as important for tax cuts as it is with government spending). Thus, as Stiglitz says, we can take tax cuts away from firms who are not responding to them and redirect them elsewhere. That gives us the desired increase in investment and growth without increasing the deficit, and hence reduces the pressure to make cuts in social programs or to raise taxes elsewhere to compensate for all the money wasted on tax cuts given to firms who will not increase investment in response. Giving tax cuts to firms who will not react to them simply redistributes income without producing the desired outcome on economic growth. Once again, if anything this type of redistribution lowers efficiency and growth, the opposite of what is intended."
The problem is that this form of highly selective tax cuts and tax increases only propagates the wealth redistribution effect you complained about earlier. If you increase taxes on industry X, you decrease the incentive for people to participate in industry X, and ironically, because there would then be fewer players in industry X, it would actually be industry X that needs additional funds for expansion and investment.
If you decrease taxes on industry Y, you would artificially be increasing the incentives to participate in that industry. Investment money would, at least temporarily, flood in, but market saturation would happen in short order. Then, industry Y would no longer be in need of those decreased taxes, because its not investing in anything.
All this tax plan would succeed in doing is artificially changing the incentives to participate in certain markets through a redistribution of wealth. In the short run, sure, you might see additional moneys in certain industries (though, since they aren't there already, this money would, by definition, be inefficiently used). In the long run, it would fail to solve any problems whatsoever.
