Inequality is a hot topic these days. Everyone seems to want to write about it. The launch of TheUpshot, the new project from the New York Times, included a story on the wealth of the middle class, the Times Sunday Review had a column on inequality and economic mobility, and Matt Yglesias can tell you “everything you need to know” about it.

But in the discussion of the cause of all this inequality, it’s sometimes good to look beyond all the data and rely on economic intuition. From a Ball and Mankiw paper:

“The fall in the capital stock affects factor prices: wages fall, harming workers, and the returns to capital rise, benefiting capital owners.”

Mankiw and Ball are talking about the crowding out of capital caused by a deficit in this scenario, but the effects are the same. When the service price of capital goes up and investment goes down. When fewer people are willing to invest, two things happen. First, the capital stock (i.e. the amount of computers, factories, equipment) shrinks over time, which makes workers less productive and decreases future wages. Second, because there is less capital available the available capital is more valuable, which causes the return to capital to rise.

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