Martin Wolf answers your questions: Topic one - Income distribution and the crisis

We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the first question, from Dirk Brouwer of the Netherlands. Martin’s response is below.

Dirk Brouwer, Amstelveen, The Netherlands: How could a more equitable distribution of income be instrumental in solving the impact of this crisis? Especially in the UK and the USA the top 20% has close to 50% of the net incomes which is one of the reasons for the bubbles on Wall Street and on the housing market.

Martin Wolf: I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent. But I am not sure about the reverse causal relationship from higher inequality to the bubble. The argument would, I suppose, be that, lacking higher incomes, a large proportion of the population borrowed in order to sustain consumption. This is possible. But I do not know of any convincing arguments for the proposition.

In any case, whatever the causal relationship, I cannot see how a more equitable distribution of income would now help solve the crisis. I suppose one might argue that it would increase sustainable consumption, though consumption already looks excessive in the US. I think one would have to argue, instead, that greater equality is a good in itself. The big question is how one could achieve it. There are limits, I think, to how much redistribution one can achieve through the redistribution of pre-tax incomes. So the aim should be to alter the distribution of pre-tax incomes themselves. I know of no easy way to do this, certainly not in the short run.

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