It’s Time To increase the Earned Income Tax Credit
I always found it odd that people argued income inequality didn’t matter. Apparently they were completely wrong – and I argue it is exactly why we have been dealing with such slow recoveries since income inequality started going up in the 80s.
To the extent that this was true, it was partly thanks to the fact that the middle class was borrowing ever greater amounts in order to support its consumption habits. But that couldn’t last forever. In 2008 all that borrowing came crashing to the ground — taking consumption along with it — and we learned once again that income matters after all. But yesterday Matt Yglesias pointed to a recent paper that adds a whole new dimension to this dispute: the authors (Orazio Attanasio, Erik Hurst, and Luigi Pistaferriargue) contend that when you correct for well-known problems in the consumption data, consumption inequality has been rising about as fast as income inequality. All the old arguments were just based on faulty data.
Or, as the authors put it, “Taken together, the results from the PSID data is that consumption inequality and income inequality tracked each other nearly identically during this time period.”
If this is all true, it means that consumption tracks income pretty well, and both have become steadily more unequal over the past three decades. Surprised?
But I’m sure the solutions to all our problems is wage and income deflation.
I propose the solution is a stronger safety net, including an increase to the Earned Income Tax Credit which would have the effect of increasing incomes without the negative effects of wage inflation (such as through minimum wage hikes which do have arguably some negative effects in a nationwide scale).