Tyler Cowen’s “The Inequality that Matters”, published in the January-February 2011 issue of The American Interest Magazine, addresses the type of income inequality that Americans, and people all over the globe, should be concerned about. Most people, Cowen says, are unaware of the bigger, economic picture, and are instead more concerned about their neighbors’ income status. According to Cowen (2011), the American economy may collapse again because of an unstable economic situation in China and Europe, undercapitalized banks, or because the economic system is broken – and no one no one quite knows how to fix it. Cowen (2011) points out that so-called real economic inequality is between the top 1%, and the remaining 99% of the populace. Moreover, this economic inequality drains the economic system of money, as the financial sector accounts for a large part of human and financial capital (Cowen).
Thus, when it collapses, its implosion affects everyone else, including taxpayers (who must bail out the banks), as well as the Federal Reserve (which is forced to loan out money to banks at almost-zero interest rates), in the hopes that the borrowers will make a lot of money, and pay the Treasury back almost immediately. Cowen (2011) also addresses what he calls high-volatility investing, or what he refers to as a “going short on volatility” type of investment strategy. In effect, this strategy is a type of government bailout because it encourages banks to make risky investments with other people’s money, namely the Treasury, which backs up any losses. During these times, money, or cash, is kept very tight due to the increased interest rate that the Federal Reserve has set (Cowen).
Hence, according to Cowen (2011), it is when the aforementioned scenario plays out that the economy goes bust, and income inequality affects the other 99% of those who are not “players” on Wall Street, such as investment bankers, hedge fund managers, or major shareholders of large corporations. Also, banks play with fire via another strategy, which Cowen (2011) refers to as “moving-first”. By doing this, larger institutions with better networking (such as AIG) can buy or sell in the market very quickly, beating out others in a race to accumulate capital. However, in the process, they have created a serious imbalance in income inequality, one that puts a huge amount of capital in the possession of those who not know how to use such a large amount of cash. Thus, these two investment strategies work in tandem, and create a problem for the rest of the non-financial sector economy – which ultimately ends up cash-poor.
Unfortunately, Cowen (2011) suggests that government regulation will not improve the situation. This is mainly due to the fact that regulators are not as clever, and are much more well-equipped to manipulate the financial sector. After all, that is their profession, and they are able to outplay government regulators by changing asset values on balance sheets (Cowen). As Cowen (2011) warns, the existing government regulations do not have enough teeth, and give bank managers a great deal of cash to make risky investments once again, threatening the entire economy by creating further income inequality.
Work Cited
Cowen, Tyler. “The Inequality That Matters.” The American Interest Magazine. January-
