Is wealth and income inequality holding the economy back? A recent study by the Pew Foundation shows that from 2009-2011 the wealthiest 7% of the US saw their net worth climb 24% – to an average of nearly $3.2M – while the other 93% of the population saw their wealth plummet 7%. More than being unfair, it may also be holding back economic growth overall. The rich may be happy with their take, but it may stop coming.
A number of studies have shown the effect over a number of countries, and the effect is undeniable. At what point does income and/or wealth inequality slow growth? Like an excess of debt it’s hard to say, but the two taken together lead to a compelling argument that the search for sustainable, meaningful growth is a strongly bipartisan, left and right issue – and something we should get moving on as a priority.
First, the new data, which was based on information compiled by the Census Bureau. The gains among the top 7% were propelled by the rise in the stock market from 2009-2011, while the losses by everyone else came largely from loss of home value. There’s reason to believe the situation is getting better, if slowly. But it is impossible for anyone to look at this and not see something like a revolution coming.
The share of total national wealth controlled by the top 7% rose from 56% to 63%. While there’s never any magic number that tells us where a tipping point is, the word “Dickensian” starts to seem reasonable.
While this simply seems unfair and politically dangerous, there is reason beyond promoting revolt that the wealthy should be worried. As we have reported here before, the distribution of income is far more heavily skewed to the wealthy than most people believe already. But across many nations with many different experiences inequality clearly limits economic growth.
A 2011 report by the International Monetary Fund (IMF) shows this clearly. While inequality does not seem to directly affect economic growth in absolute terms, it is one of the strongest factors for creating sustainable economic growth. What has held undeveloped and developing nations back over the years has not been a lack of growth. But it often collapses in just a few years, such as what is happening now with Brazil’s “Chicken Flight” economy (which flies like a hen).
How does that square here in the US? Below is a murky graph that combines way too much information, but the trends are best shown together. In blue is the quarterly growth of US GDP since 1968. In red is the Gini Coeficient, a measure of inequality where 0.0 would be perfectly equal income (everyone the same) and 1.0 is perfectly unequal (one person gets it all).
1968 marked an inflection point in the Gini Coeficient, which as you can see has trended solidly upwards (towards inequality) since. In that time GDP has bounced up and down quite a lot over the years – but appears to be generally trending down since 1980. It certainly appears that we are generating less sustainable growth since the trend toward inequality started.
This is perfectly reasonable if you think about it. We have been a middle class consumer economy for at least as long as the term on this graph, which is to say driven by spending. As we have seen through the recovery phase of this Depression, job growth has led GDP growth in a way that is at least unusual. This is shown even more clearly in Canada, a nation that stands as an outlier in that it has had decent economic growth but low productivity growth and a relatively high load of debt. A study there shows that jobs, not productivity, are the key to sustained growth.
Which gets us back to the issue of debt, the other thing that we know can choke off growth at some point. The Canadian experience is literally one of the points that brought down Reinhart and Rogoff’s 2010 paper, as reported before. Just like inequality, there is no magic number – but a high level of debt service is a big drain as money flows towards the banks and wealthy people that lent it in the first place. That has a net effect of transferring wealth to those who already have it – increasing inequality.
They become the same issue at some point.
But what this points towards is a very bipartisan agreement that debt needs to be reduced – both public and private – while methods of growing equity need to be pursued. One of the key ways of improving equality has always been infrastructure development, something that often allows equal access to markets, among other effects. When there is a need to run a deficit, having one that is a clear investment is very different from borrowing money to make payroll.
While there is a big public outcry from one side about debt, narrowly focusing on public debt only, there is no corresponding push from the other side for greater equity and investment in the economy. That’s the compromise that we can, and should be working towards – a bipartisan agenda for sustainable growth.
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Robert Kuttner in the New York Review of Books recently wrote about this very same thing the large private debt. You are both on to something but I don’s see where the leadership on this is going to be coming from. I think a lot of people view debt in moral terms and become rather individualistic.
It is a matter of leadership, and I hope to provide some small measure of it here. It’s not a moral issue as much as it is a practical issue – how do we provide good, sustainable growth? That’s what I think government is about. And yes, infrastructure is a big part of that!
In the 60s, when I was growing up, working-class people could hope for a trailer at the beach, a secure pension, and their kids could go to a university and live in a dorm. This sort of prosperity has died the death of a thousand cuts and is pretty much gone. People have diminished their expectations and mostly aren’t blaming anybody.
On the other hand, it would be hard to deny that there is justice in the increase in the prosperity of Mexican and Chinese and Indian workers at the expense of US workers. They need more and we can make do with less. This readjustment is inevitable and fundamentally desirable.
But the growth of economic inequality is another story. If we don’t fix this–and the Dems are no better than Bush in this regard–our society will be destabilized and we may then lack the resources to fix it. We needed another FDR, and we got an Obama.
We do need another FDR – and / or a revolution. This cannot continue. And people will have to be engaged to make it happen, one way or the other.
It does make perfect sense that a consumer economy needs disposable income to prosper. I would think that anything which cuts into that is a problem if it’s debt service, high cost of living like you have in some places, etc. Consumer spending went way down in 2008 after the collapse and that took a lot out of the economy. It is only coming back as people get jobs, like you keep saying. So this all makes sense. What level of inequality is a problem though I can’t say. It probably is a problem at all levels but just gets worse as inequality gets worse.
Thanks, you are right! I should be looking at disposable income and savings. Those are the key indicators for sustainable growth, I’ll bet. As Dan said, I’ve been a bit too macro lately and it’s time to focus on more personal things. Excellent way of looking at it!
Frankly I don’t know why more economists don’t talk about this. I think it points to the fact that economies are the product of design not evolution. When we ask if an economy is “working” we have to ask working for “whom?” You can have economy that works for the top 7% but ultimately it’s less sustainable than one that works for everyone. You should look into Kevin Phillips work on the Great Contraction of the 50s. You the disparity rise in the early 60s along tax cuts for the wealthy and declining labor union participation.
I think declining labor participation is probably the key – tax cuts for the wealthy didn’t hit until the 80s and the process was well under way by then (to my surprise, frankly). It is an amazing fact of the last … well, my entire life.
I do think that economies are pretty heavily designed – they are a broad social agreement that is influenced by a lot of things. One “agreement” we seem to have institutionalized is the supply-side theory – that money for investment is so very important and worth more or less subsidizing. Cheap capital and socialized risk are hardly ever questioned, at least not in any big way! Equality has simply not made its way into our discussion for a long time. So yes, this is all planned in a certain sense – it reflects the values we hold as a people.
Thank you for your contribution, you have me thinking a lot more. I will look into the Phillips, he has done some great stuff I’ve read in the past.
(Barataria is a community effort and I really can’t say how much I appreciate how you guys get me thinking about the next piece!)
Looking at the tax cut and your graph (I’ve seen this graph before) I’ve been struck by the effect of Reagan’s mid 80s tax cuts. You can see an almost immediate decline, followed by some recovery in the 90s (but remember Clintion raised some taxes in the 90s) followed a permanent drop with the Bush tax cuts around 2001. It’s a pretty dramatic effect actually, GDP growth rate has never gotten much above 5% since the Reagan tax cuts took effect. Were you to calculate the average growth rates before and after the Reagan tax cuts you’d see that GDP growth has been about half of what it was prior to the mid 80s. Of course whether or not the tax cuts were causal is a legitimate question but the correlation is undeniable.
Good blog. I think there is a lot more to say on this & you have only scratched the surface. For example, how do you balance the budget AND invest in infrastructure at the same time? I know it’s all about priorities but what would you cut to make that happen?
I don’t see anything wrong with running a “deficit” for the purpose of bonding for capital items – the way every state does it. It is not clear to me how much we spend on capital items right now, but my guess is that it’s a couple hundred bil at most.
So I would say that moving towards balance WHILE we change how we budget to separate out capital and expenses and investing in infrastructure is going to be possible.
So I’d raise taxes through major simplification and reform while cutting a lot from the military to pay for it all. The idea is that infrastructure will help the economy so much that every $1 spent on that can have the same beneficial effects of several dollars of military spending.
Another thing we need to keep in mind is the fact that we can afford our government spending, it’s not a zero game. We trapped by false dilemmas and manufactured crises so often in the US when thinking about economics. We have the largest economy in the world, twice as large the next largest economy. Despite the Great Recession our GDP has grown by nearly $4 trillion in the last ten years. We do not have a bankrupt nation but everyone seems to act like we do. The money is there, and more of it than has been in previous economic eras. We are NOT stuck with an either/or zero sum economy, and government has proven to be an economic growth generator many time over. For some reason people have just decided they can have government without paying for it, or that they don’t need government, or that government spending is a drag on the economy. These are all patently false assumptions.
Yes to all, except the EU is about the same size we are. 🙂 But look at how things are going between these two giants that make up nearly half the world – we are in great shape by comparison! We are not doing all that badly – but we do have to watch things. That’s not a terrible position to be in, at least compared with the rest of the developed world. Look at Japan – Yeesh!
The belief that government spending is a drag is ludicrous when taken to the extreme, yes, and we have to counter that. There are forms of government spending that are clearly beneficial and/or we are way low on, such as infrastructure. It’s clear that an organized health plan of some kind HAS to be an improvement over what we do now. Yes, there are some things we can argue about, but there always are – we have been thrown to the silly side of so many otherwise reasonable disagreements!
Actually I think we’re in a superior position to the EU as far as potential is concerned. Ironically we have a huge advantage because we’ve fallen so far behind them in terms of infrastructure, we’ve let our collapse while they constantly upgraded theirs. I think I’ve seen estimates that we need something like $14 trillion in infrastructure spending just to bring our existing transportation up to grade. Throw in a real bullet train system (not this 110 MPH joke we call high speed rail), wire the whole country for inexpensive high speed internet, all connected to new local mass transit in our cities and your talking about creating hundreds of thousands of decent paying jobs for decades to come. Hell, build a high speed freight rail line from coast to coast connected to those super faster ports the Koreans have and we could even give the Panama canal a run for it’s money not to mention super fast national distribution. Instead of talking about any of this we’re arguing about a 2% tax on the wealthy?
Yes, I agree we are in a superior position to Europe in just about every way – and the one way we are behind you point out well that it’s an opportunity if we get our act together.
Imagine linking everything together – it’s something I’ve called for before.
It’s been a long time since I wrote about it, but the need for fast freight systems is easily demonstrated. I also think it’s important to note how containerized cargo is almost as important as the internet in fueling the new economy that is being created.
I like how you think of this as an opportunity to get people back to work, that’s the kind of thinking we should have. Yes, talking about tax cuts here or there to “stimulate” is total BS by comparison!
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