Tyler Cowen discusses how our current level of unequal incomes has happened and what it means for our economic future (the most interesting part of the discussion comes late in his article). Our problem is that we have allowed (or been helpless to prevent) a marginally productive industry (finance) to take over the economy to the point where rewards bear little relationship to the benefits provided and may, because of the periodic crashes, cost in aggregate far more than they contribute to society.
The basic problem is that the financial sector reaps the gains during flush times and the rest of us pay the bills when things turn bad. This is not a zero sum game within the financial sector. The key is what Cowen calls "going short on volatility." Wall Street habitually bets against "tail outcomes," --unlikely disasters. They can reap enormous profits and when the unlikely events occur, they hand the bill to the government. The tempting response is to say, let them fail, but the financial sector is not wholly without beneficial impact on the economy. Despite the merry-go-round of fairy dust laden collateralized debt, the financial sector does make actual loans to productive enterprises and helps to reallocate consumption and savings through time, as well as providing the bulk of the means of payment that keeps the economy moving.
Once commercial banks become embroiled in the non-productive aspects of financial activity, we are all at risk and the government has no alternative but to step in and halt the crisis. The depressing side is that because the malefactors were unpunished in any real sense, we are left with the prospect that it will happen again.
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