Theories on the causes of Inequality and the crash

From DeLong:

So here are five things that I thought I knew three or four years ago that turned out not to be true:

1. I thought that the highly leveraged banks had control over their risks. With people like Stanley Fischer and Robert Rubin in the office of the president of Citigroup, with all of the industry's experience at quantitative analysis, with all the knowledge of economic history that the large investment and commercial banks of the United States had, that their bosses understood the importance of walking the trading floor, of understanding what their underlings were doing, of managing risk institution by institution. I thought that they were pretty good at doing that.
2. I thought that the Federal Reserve had the power and the will to stabilize the growth path of nominal GDP.
3. I thought, as a result, automatic stabilizers aside, fiscal policy no longer had a legitimate countercyclical role to play. The Federal Reserve and other Central Banks were mighty and powerful. They could act within Congress's decision loop. There was no no reason to confuse things by talking about discretionary fiscal policy--it just make Congress members confused about how to balance the short run off against the long run.
4. I thought that no advanced country government with as frayed a safety net as America would tolerate 10% unemployment. In Germany and France with their lavish safety nets it was possible to run an economy for 10 years with 10% unemployment without political crisis. But I did not think that was possible in the United States.
5. And I thought that economists had an effective consensus on macroeconomic policy. I thought everybody agreed that the important role of the government was to intervene strategically in asset markets to stabilize the growth path of nominal GDP. I thought that all of the disputes within economics were over what was the best way to accomplish this goal. I did not think that there were any economists who would look at a 10% shortfall of nominal GDP relative to its trend growth path and say that the government is being too stimulative.
   
   
    I have five theories:
   1. Perhaps the collapse of the union movement means that politicians nowadays tend not to see anybody who speaks for the people in the bottom half of the American income distribution.
   2. Perhaps Washington is simply too disconnected: my brother-in-law observes that the only place in America where it is hard to get a table at dinner time in a good restaurant right now is within two miles of Capitol Hill.
   3. Perhaps we are hobbled by general public scorn at the rescue of the bankers--our failure to communicate that, as Don Kohn said, it's better to let a couple thousand feckless financiers off scot-free than to destroy the jobs of millions, our failure to make that convincing.
   4. I think about lack of trust in a split economics profession--where there are, I think, an extraordinarily large number of people engaging in open-mouth operations who have simply not done their homework. And at this point I think it important to call out Robert Lucas, Richard Posner, and Eugene Fama, and ask them in the future to please do at least some of their homework before they talk onsense.
   5. I think about ressentment of a sort epitomized by Barack Obama's statements that the private sector has to tighten its belt and so it is only fair that the public sector should too. I had expected a president advised by Larry Summers and Christina Romer to say that when private sector spending sits down then public sector spending needs to stand up--that is is when the private sector stands up and begins spending again that the government sector should cut back its own spending and should sit down.