Maybe the Rich Are the Problem

John McCain clearly thought he'd found a winning issue last week when Barack Obama was caught on tape defending his plan to tax the rich and "spread the wealth around."

Gotcha! For days, the faltering Republican nominee relentlessly harangued Obama for saying such a thing, championing "Joe the Plumber," whose confrontation with Obama had provoked the remark.

Of course, many were surprised when Joe the Plumber turned out to be neither a real plumber nor a guy named Joe.

More surprising was the fact that - like the famous bridge in Alaska - McCain's attempt to vilify Obama for wanting to "spread the wealth around" ended up going nowhere.

For decades, conservatives have disparaged the notion of "spreading the wealth," relegating such economic populism to the margins of public debate. The vast pools of wealth at the top have been off-limits as a political issue - in the United States and Canada.

But a seismic shift could be underway. With the financial crisis exposing Wall Street's greedy and reckless behaviour, the public may be becoming less deferential to the super-rich. Last weekend, CNN ran a special on Wall Street called Fall of the Fat Cats - a damning take on the nation's financial elite that would have been inconceivable only a few months ago.

So far, the focus has been mostly on the misbehaviour of "fat cats," and the need, therefore, for tighter market regulations. But a more profound question lurks beneath the surface: Is extreme inequality itself part of the problem?

Some analysts are now arguing that the extreme concentration of wealth may have contributed to the crisis, just as a similarly extreme concentration of wealth in the 1920s contributed to the crash of 1929 and the Great Depression.

In his classic The Great Crash 1929, the late economist John Kenneth Galbraith put "the bad distribution of income" - the top 5 per cent of the population received one-third of all income - at the top of his list of key factors causing the disaster.

James Livingston, a historian at Rutgers University, sees strong similarities between then and now.

Livingston points out that in the 1920s there was a massive shift in the distribution of income away from wages toward corporate profits. With consumer demand suppressed by the restraint on wages, corporations had little incentive to invest their hefty profits in expanding production. So they turned to financial speculation.

Since the 1980s, there's been a similar income shift away from wages toward profits. Livingston argues that, with consumer demand suppressed, George W. Bush's massive tax cuts for the rich "produced a new tidal wave of surplus capital with no place to go except real estate," fuelling the housing bubble.

This suggests extreme inequality itself may lead to financial speculation. If so, meaningful solutions may have to go beyond re-regulation, and include a return to higher taxes on the rich.

Of course, the rich - and their think-tanks and media outlets - would insist such measures will stifle economic growth. But in the years between the Great Depression and the 1980s, financial markets were tightly regulated - and the rich were highly taxed. Yet - and this is crucial - those early post-war decades were times of great prosperity and growth.

Progressives have long argued for higher taxes on the wealthy - on grounds of fairness. But now, as the financial meltdown threatens to destroy the real economy, fairness may be secondary. Taxing the rich may boil down to a question of economic survival.