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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

August 6, 2014 at 10:06 AM

Yes, inequality hurts the economy

A study arguing this might at first glance seem like research that shows the common cold makes sufferers sneeze. But a new report from Standard & Poor’s, “How Income Inequality is Dampening U.S. Economic Growth and Possible Ways to Change the Tide,” is important nonetheless. A powerful segment of political and business leaders deny inequality has been growing worse at all, and, if it has, it’s the fault of lazy “takers.”

Also, S&P represents the Wall Street establishment. So this moves an argument that has been advanced by economists Joseph Stiglitz and Thomas Piketty, our own financier Nick Hanauer, as well as activists favoring a higher minimum wage, into the business mainstream. Attention should be paid. Nobody can dismiss this research as coming from a pinko front. (Although, remember two axioms: Upton Sinclair’s “It is difficult to get a man to understand something when his job depends on not understanding it” and the timeless “You can’t cure stupid”).

The new report lays out what should be obvious: As more income goes to the richest, who save more (and gamble in the markets and seek rents), there’s less demand and weak growth. This makes digging out of recessions even harder. The embattled middle class loads up on debt after even both adults in a household are working (and wages stagnate). It creates a feedback loop that works against upward mobility. John Maynard Keynes observed this decades ago.

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, 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 .

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.

The report doesn’t go deep enough into causes, such as industry consolidation, loss of a progressive tax system, financialization, ill-considered trade deals and rent-seeking, and thus it’s responses are inadequate. It is also rich that Standard & Poor’s, which enabled so much reckless behavior leading to crashes and recessions, is now sounding an alarm. But that’s also a sign of how serious inequality is for the nation’s future.


Wednesday Reading: Starbucks secret weapon is machine from sleepy Swiss village | Bloomberg


Today’s Econ Haiku:

What if T-Mobile

Instead of staying in play

Just ran a business


Follow me on Twitter @jontalton

You won’t be bored.

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