Does Income Inequality Hurt the Economy?

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New York Times reporter Annie Lowry notes this week that a “growing body of economic research” indicates that the “yawning gap between the haves and the have nots” may be a major factor in slowing economic growth and job creation in the years ahead. A recent report from the International Monetary Fund concluded that “reducing inequality and bolstering growth may be ‘two sides of the same coin.'”

Chart: Change in Share of Income; Courtesy of Mother JonesDespite the fact that income inequality has been a trend since the early 1980s, Lowry writes that economists and institutions like the IMF and the World Bank have only recently come to view economic inequality as a force driving unstable growth, rather than merely a “side effect of policies that fostered the country’s economic dynamism” — such as tax incentives for investors, among others — as previously thought.

“The Organization for Economic Cooperation and Development this year warned about the ‘negative consequences’ of the country’s high levels of pay inequality, and suggested an aggressive series of changes to tax and spending programs to tackle it.

The I.M.F. has cautioned the United States, too. ‘Some dismiss inequality and focus instead on overall growth — arguing, in effect, that a rising tide lifts all boats,’ a commentary by fund economists said. ‘When a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss.’

The concentration of income in the hands of the rich might not just mean a more unequal society, economists believe. It might mean less stable economic expansions and sluggish growth.

That is the conclusion drawn by two economists at the fund, Mr. Ostry and Andrew G. Berg. They found that in rich countries and poor, inequality strongly correlated with shorter spells of economic expansion and thus less growth over time.”

Traders work on the floor of the New York Stock Exchange, Tuesday, March 9, 2010.(AP Photo/Mark Lennihan)

Traders work on the floor of the New York Stock Exchange. (AP Photo/Mark Lennihan)

Even the editors at The Economist fell in line offering a manifesto of sorts in this week’s issue of the magazine, entitled “True Progressivism.” Their special report calls for a “new form of radical centrist politics… to tackle inequality without hurting economic growth.”

The agenda includes a three-point plan that “steals ideas from both left and right” and advocates “Rooseveltian attacks on monopolies” (including big banks), better targeting of government spending on the poor, the elderly and the young (means-testing, raising retirement ages, investing in pre-school education) and tax reforms (eliminating deductions that “particularly benefit the wealthy”).

The issue has already generated a lively discussion online including hundreds of comments on their website, as well as a scathing retort from New American Foundation cofounder Michael Lind (who calls The Economist‘s progressivism “phony”) in Salon.

Demos Policy Shop blogger Jennifer Wheary notes that:

Raising an alarm about inequality and advocating these types of solutions is nothing new. What has changed is the volume of voices now participating in the conversation. For anyone but a presidential candidate, 2012 seems to have thus far been a conscious-raising year for the inequality issue.

We welcome that debate of new ideas. As Wheary concludes in her post, it’s “better to battle about what to do about inequality than to sweep the matter under the rug.”

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  • Thomas Sanford

    One of the first things that should be done to address income inequality is to raise the minimum wage.

  • Robert Dale

    Tax and educate. Tax and build.

  • just me

    Finally someone making statements about both sides of the fence being important in this issue! YES. In the duality of all things… we do indeed need both sides of the political financial philosophies! With prosperity there will still be poverty, but by shortening the distance there is actually a better chance of more people prospering! How hard is that to understand? Resource and knowledge of how to access resources… is what’s missing for people who live in poverty. It isn’t motivation… It’s having resources and access – over and over again we see this when dealing with low incomes. The future should be focused on making everyone more financially secure. Talk about world empowerment rather than the few controlling the masses.

  • Owen Johnson

    The lessons of history are very clear on this issue. We can look at any 3rd world country, past or present, and see the results of extreme income differentiation: no economic growth. We can also look at our own record and see that when the middle class has had more economic opportunity, our economy has boomed. In fact, had it not been for periods of middle class growth, the upper class would not have acquired the wealth they have.

    If we also look at countries with growing economies that have also become much more stable (examples: Chile, Peru, Mexico) they all have one thing in common: a growing middle class with more upward mobility.


  • Ed Lucas

    I’m all for cutting the radical inequality problem–that’s a matter of will and policy, etc. But other of my concerns fall along the lines of whether economic growth is the way of the future anyway. Authors like Richard Heinberg (The End of Growth and others titles) and James Kunstler (Long Emergency, Too Much Magic) are voices saying the growth party is over thanks to a couple hundred years of industrial activity and so many signs that the environment can’t handle our plans and won’t let them be fulfilled.

    So it’s hard to say who the joke is on: while the robber barons of today are having their party, the joke is on them since the underlying structure of economic growth itself is being stressed. That might see their days numbered, but it might also prove to be that the comfortable middle class we all know and love is a thing of the past whether the robber barons stay or go. It might just be that a lower standard of living awaits us all, but maybe at that level, things by their very nature wouldn’t be so distorted as they are now.

  • Picsnilderf

    Only in a vast Misinformation Age where propaganda trumps truth and common sense could so many for so long successfully be lead to believe that if we just allow the wealthier to become more so all will be well.
    Such is the main supposition of supply-side, trickle-down theory; which has dominated economic theory for 30 years.
    So well indoctrinated of this theory have most Americans become that a 2nd Great Depression may be required before they rid themselves of obvious fantasy.

  • Michele Wrenn

    The right only see it as class warfare. They don’t listen or see the big picture.

  • David

    to a liveable wage

  • Fred Daniel

    So much focus on measuring Income (actually wealth) Inequality, but so little effort to examine real causes, beyond looking for a Republican behind every corner. Consider my experience, the SEC “Accredited Investor rule” which definition does not include any reference to knowledge of markets or business education is the main problem. It simply limits private investment opportunities to the wealthiest, at the expense of the bottom 93.5%, even if someone is better educated about business or investment. Also, in the late 70’s, the FHA stopped making home loans fully assumable. This stopped a neighbor from selling his home to another neighbor, by simply paying cash for the equity, signing a Quit Claim Deed, and notifying the mortgage holder. Today, it is more difficult as the original owner is no longer relieved of the loan obligation. Our government seeks to protect us from our own decisions, at the expense of our net worth. With help like this, who needs enemies?

  • Alison Huse Farhner

    How is this not a no brainer?