Economists Agree: US Inequality Is Killing the Economy

'The economic populists are right'

A majority of "private, corporate and academic economists" agree: economic inequality in the U.S. is not just hurting individuals and families who struggle to make ends meet; the growing gap in both wages and wealth is harming the economy as a whole.

That's according to a new survey by the Associated Press which confirms what progressive-minded economists and policy-makers have been saying since... always.

After asking more than three dozen economists a host of questions about trends in the current economy, the survey discovered that one of the chief concerns shared by most is the stagnation of the middle class as the rich get richer. Why? According to what AP gleaned from economists:

Higher pay and outsize stock market gains are flowing mainly to affluent Americans. Yet these households spend less of their money than do low- and middle-income consumers who make up most of the population but whose pay is barely rising.

"What you want is a broader spending base," says Scott Brown, chief economist at Raymond James, a financial advisory firm. "You want more people spending money."

Spending by wealthier Americans, given the weight of their dollars, does help drive the economy. But analysts say the economy would be better able to sustain its growth if the riches were more evenly dispersed.

As the debate in Washington and across the country about economic inequality receives fuel from a populist surge that has included growing demonstrations by low-wage workers and calls for a large federal increase of the minimum wage, the consensus by this diverse group of economic minds should bolster those calling for real policy changes in the wake of the financial collapse of 2008.

As Paul Krugman, noted Kenyesian and columnist for the New York Times, wrote this week: "The economic populists have it right."

Citing the numbers, Krugman explains:

On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie. Which mattered more? The answer, amazingly, is that they're more or less comparable -- that is, inequality is rising so fast that over the past six years it has been as big a drag on ordinary American incomes as poor economic performance, even though those years include the worst economic slump since the 1930s.

And if you take a longer perspective, rising inequality becomes by far the most important single factor behind lagging middle-class incomes.

And going deeper than that, Nobel laureate Joseph Stiglitz explains the four main reasons why inequality stifles economic health and a more broad-based recovery:

The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle -- who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators -- have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable -- it was reliant on the bottom 80 percent consuming about 110 percent of their income.

Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses.

Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks. The recent modest agreement to restore Clinton-level marginal income-tax rates for individuals making more than $400,000 and households making more than $450,000 did nothing to change this. Returns from Wall Street speculation are taxed at a far lower rate than other forms of income. Low tax receipts mean that the government cannot make the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength.

Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable. Though inequality did not directly cause the crisis, it is no coincidence that the 1920s -- the last time inequality of income and wealth in the United States was so high -- ended with the Great Crash and the Depression. The International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven't absorbed the lesson.


Our work is licensed under Creative Commons (CC BY-NC-ND 3.0). Feel free to republish and share widely.