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Confusing effect with cause again

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Clay Bennett/Staff/File

This political cartoon first appeared in the Christian Science Monitor in Sept 2007.

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This New York Times story claims to have found a strong correlation between financial bubbles and income inequality.

I don't doubt that a strong historical correlation exists, but from that it doesn't follow that income inequality causes bubbles. Instead, the correlation exists because a common factor, inflationary monetary policy, causes both. Or more specifically, inflationary monetary policy creates higher inequality by creating a bubble that by lifting the net worth of the wealthy and by enriching financial companies causes inequality to increase. Inflationary monetary policy creates the bubble which in turn creates higher inequality.

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Thus, higher top income tax rates will not reduce the risk of financial bubbles. Only less inflationary monetary policy will.


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