Sunday, December 23, 2007

Krugman and Inequality Since the 1970's

The synopsis of Paul Krugman's latest book The Conscience of a Liberal, contains
With this major new volume, Paul Krugman, "the heir apparent to Galbraith" (Alan Blinder) and, today’s most widely read economist, studies the past eighty years of American history, from the reforms that tamed the harsh inequality of the Gilded Age to the unraveling of that achievement and the reemergence of immense economic and political inequality since the 1970s.
On August 15th, 1971, Nixon closed the gold window and officially took the United States off the gold standard. We switched to a new monetary system based on fiat currency. I don't think it's a coincidence at all that this is when we saw the "reemergence of immense economic and political inequality." As I pointed out in Federal Reserve and the Inflation Tax, without anything backing the currency, the Federal Reserve in conjunction with the federal government can grow the money supply and effectively print money. This inflation disproportionately hurts the poor and the middle class by eroding their wages and dollar savings. This is known as the "Inflation Tax" and it is the most regressive tax of all. Wealthy people protect themselves by keeping the majority of their wealth in hard assets whose real value isn't affected by inflation.

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