The topic of income inequality and its effects has been the subject of countless analysis stretching back generations and crossing geopolitical boundaries. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: Would the U.S. economy be better off with a narrower income gap? And, if an unequal distribution of income hinders growth, which solutions could do more harm than good, and which could make the economic pie bigger for all?
Given the decades–indeed, centuries–of debate on this subject, it comes as no surprise that the answers are complex. A degree of inequality is to be expected in any market economy. It can keep the economy functioning effectively, incentivizing investment and expansion–but too much inequality can undermine growth.
Higher levels of income inequality increase political pressures, discouraging trade, investment, and hiring. Keynes first showed that income inequality can lead affluent households (Americans included) to increase savings and decrease consumption (1), while those with less means increase consumer borrowing to sustain consumption…until those options run out. When these imbalances can no longer be sustained, we see a boom/bust cycle such as the one that culminated in the Great Recession (2).
Aside from the extreme economic swings, such income imbalances tend to dampen social mobility and produce a less-educated workforce that can’t compete in a changing global economy. This diminishes future income prospects and potential long-term growth, becoming entrenched as political repercussions extend the problems.
Alternatively, if we added another year of education to the American workforce from 2014 to 2019, in line with education levels increasing at the rate of educational achievement seen from 1960 to 1965, U.S. potential GDP would likely be $525 billion, or 2.4% higher in five years, than in the baseline. If education levels were increasing at the rate they were 15 years ago, the level of potential GDP would be 1%, or $185 billion higher in five years.
Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population.
H/t Shawn Sukumar.
Everyone knows that income inequality is killing the world economy as well as people. Unfortunately since the right wing terrorists on the Supreme Court ok’d the selling of our political system, the greed of the 1% is all that counts.
Why is it mandatory or even necessary to have private investment in a society? Where is it written that for a society to function properly and be successful it must embrace the Capitalist economic system (model)? Why can’t a government by, for and of the people—a representative government—control all of the investment capital? The oligarchy has sold “we the people” on the false premise that only rich capitalists are smart enough to wisely invest the people’s money. If YOU controlled all of the available investment cash how would you invest it? Would you give tax breaks to Big Oil or would you invest it in wind farms and solar farms. Would you subsidize Big Coal or would you retrofit every building with solar panels? Would you give $1 trillion dollars to defense contractors to build weapons of war? Or would you use some of that money to prevent algae buildup in the Great Lakes? Shouldn’t we (99%) decide how to spend our tax dollars and not leave that decision up to the corrupt politicians purchased by the oligarchy(1%) to represent them? Capitalism is a con and we are its victims.