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• Wednesday, April 2, 2008 08:02 AM

  The Fallacy of Composition

  Mr. Leonard's analysis fails victim to the Fallacy of Composition. No proof is offered that rising income inequality contributed to the Great Depression, and no case can be made that similar income inequality today puts us in danger of a rerun. It is better to make the case against high income inequality on the grounds of social justice than to attempt to prove it using flawed economic analysis.

  The tax system certainly can be used to level incomes without significant economic harm. (I suspect that the Laffer Curve argument is true only at very high marginal tax rates, say 70% or more.) But there will be plenty of time to raise taxes on the wealthy once the current mess is behind us. It would be highly irresponsible to raise rates in the context of a credit crunch and GDP contraction. The "Roosevelt Recession" of 1938 proved that. Or as Nixon said, "We are all Keynesians now."

  Finally...It is not possible for regulation to forsee every wrinkle in financial instruments. Handing broad powers to the Federal Reserve to intervene in the "shadow" banking system as well as with member banks seems to be a good way to catch trouble before it becomes a crisis. Combining the SEC and the CFTC makes intuitive sense because a great many firms are involved both in securities and commodity trading. I'd not call it dismantling the New Deal so much as bringing it up to date. The repeal of Glass-Stegal some years ago may well have been a mistake. But that is an essay in itself.

  -Ted Faraone

  —Tedco Read Tedco's other letters
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