Should We Care About Income Inequality, Now That It Is Killing The Economy?

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Last Updated: 17, February 2012

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In the last few years, the debate on socioeconomic inequality has received greater media attention and academic interest, especially after last year’s Occupy Movement. However, governments across the world have been slow to enact real changes to address the rising epidemic. Income disparities have the potential to upset social equilibriums, and when that happens, the economic recovery might inadvertently be stalled.

One of the more dismal facts about the US economy, right up there with the Gargantuan debt figure, is the shrinking average wage being handing out to Joe Citizen, assuming Joe Citizen is lucky enough to have a job in a country where nominal unemployment is above 9% and real unemployment is probably above 15%.

Alan Krueger, a labor economist and the Chairman of the Council of Economic Advisors, has been tracking the growth of inequality in the Land of the Brave and the Home of the Free for the last few decades. On 12 January he gave a scathing speech on this theme to the Center for American Progress.

For most of his working career, Krueger said, he has resisted the term “inequality”, preferring to use the more emotionally neutered phrase “income dispersion” to reflect the way rewards flow from the economy to the pockets of individual citizens. However, as he put it:

[quote] … the rise in income dispersion – along so many dimensions – has gotten to be so high that I now think that inequality is a more appropriate term… the rise in inequality in the US over the last three decades has reached the point that inequality in incomes is causing an unhealthy division in opportunities and is a threat to our economic growth. [/quote]

This is not just a matter of intrinsic fairness and decency. The US economy is actually ossifying, Krueger argues, and the major motor of US economic growth, consumer spending, is being throttled by too much flowing into the bank accounts of too few. Billionaires do not spend anything like as much as would be the case if the same amount of money was dispersed over a much larger number of consumers. They simply end up fretting about where they can “store” their vast surpluses more efficiently to avoid it being leached away by either inflation or the periodic economic contractions that sweep through advanced economies with depressing regularity.

There is a not so comic parallel here with the traditional land owners of a few centuries past whose granaries were bursting, and who worried about rats getting at the grain, while the peasants starved.

Krueger quotes a telling phrase from a recent speech by President Obama on the theme of rising inequality:

[quote]Over the last few decades, Obama said, the rungs on the ladder of opportunity have grown further and further apart, and the middle class has shrunk… [/quote]

The figures behind this concern do not make pretty reading. The annualized growth rate of real incomes for the period from the end of the Second World War to the late 1970s were roughly the same across the whole spectrum of incomes. Since the 1970s, however, those at the top of the scale have surged forward while those at the bottom of the scale have seen their incomes shrink. Those in the middle have barely trod water. Instead of growing together, the US is growing apart…

Krueger gives former President Clinton, now regarded as at least partially to blame for the 2008 crash since he was responsible for both repealing Glass Steagal and stoking the sub-prime mortgage market, some praise here. The history of incomes shows that during the eight years of Clinton’s tenure in the White House, from 1992 to 2000, all income groups experienced their fastest ever income growth.

Under Presidents Bush, father and son, as reported by the impartial Congressional Budget Office, the top 1% of families saw a 278% increase in their real after tax income, while the middle 60% saw a real increase of less than 40%. Not surprisingly, the distance between the top 1% and the trailing pack is now obscenely large. According to Krueger, the change has been the equivalent of shifting $1.1 trillion of annual income to the top 1% of families. “Put it another way, the increase in the share of income going to the top 1% of families over this period exceeds the total amount of income that the entire bottom 40% of households receives,” he says.

The path the US is on is simply not sustainable, he concludes. “Ohhh say can you see…”

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

Why Income Inequality Is Killing the US Economy is republished with permission from the QFinance Blog. Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.

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