Inequality and Economic Growth

The growth of income inequality, and the disturbing erosion of the middle class have been  well documented.

Aside from the human consequences of that inequality, there are economic ramifications. Theoretically, some measure of income inequality provides those who have less with an incentive to work harder–in economist-speak, an incentive for increased economic output. However, a 2014 OECD report found that economic inequality and economic growth were inversely related.  Countries with falling rates of inequality grew more strongly than those with rising rates.

When you think about it, this makes sense. In economies like ours, we rely upon consumer demand to fuel economic growth. Moderate levels of inequality don’t matter, so long as there is a sufficient middle-class with sufficient disposable income to grease the wheel. So long as those with less still have “enough”–defined as income available after life’s necessities have been covered–and so long as they continue to purchase goods and services with that income, the economy can be expected to grow.

When the distribution curb is “bimodal,” with lots of people barely eking out a living and a few others sitting on piles of money, the picture changes. The poor have little or no disposable income with which to purchase goods and services, and the rich can meet their needs and desires without depleting a significant portion of their assets. In any event, there aren’t enough of the rich to drive economic growth, even if they spent lavishly.

When people don’t buy, manufacturers don’t make. When manufacturers don’t make, they don’t hire workers (or keep the ones they have). Retailers close or downsize. Eventually, the assets held by the 1% lose their value.

A rising tide may lift all boats, but the tide won’t rise without water.

We really are all in this together.

18 Comments

  2. Ah, Inequality and Economic Growth. That subject is one I can relate to; only the Inequality part. I commented on another blog that I agree with raising minimum wage and that, using my trusty calculator, I had added my Social Security and PERF monthly checks, figured on a 40-hour work week and my “wage” is $6.67 per hour. I want a raise!

    This is the fourth year no COLA increase on PERF but…we do get the “13th check”; I consider it a dividend from profits of our carefully invested PERF funds. Mine is $275 annually. The Retired Indiana Public Employees Association (RIPEA) keeps us regularly informed of their progress in the legislature attempting to allow COLA again. The final bill they put before the legislature was to give us a 3% COLA but lower our annual “13th check”. I got out my trusty calculator to do some figuring; my monthly PERF check plus 3% increase annual amount and added the new “13th check” amount of $175. Had this been passed I would have received 1 cent LESS than my current annual amount the first year. I had to thank the legislature for not going for the deal; I prefer the status quo in this instance. I could see no Economic Growth in sight with RIPEA’s version of COLA benefit.

  3. Thank you for this message. For the ‘Scott Walkers’ in life who think union busting and poor employee pay and benefits are a good idea, company owners can’t sell and make a profit when too few folks have enough money to buy. As you said so well, a financially comfortable middle class is in everyone’s best interests.

  4. Please go watch Citizen Koch, it’s available on Netflix. Has some very enlightening info. I see why the Koch brothers wanted it pulled from PBS. There is a business owner there who debunks the myth of the 1% driving job growth and economic prosperity.

  5. Also in everyone’s best interests is a strong, wide safety net. The ideal of all boats rising on the same tide should include the ideal of no boats sinking.

  6. What amazed me was Reagan’s ability to read scripted attacks on unions without recourse. Not a soul complained loudly. There should have been a national strike.

    Quilds go back to the middle ages and helped to create the middle class. The only unions left are above the law, doctors, lawyers and bankers and the very powerful FOP fully funded by the NRA.

    How’s that float your boat?

  8. Using the “tide” metaphor, I think the ultra rich actually have their boats in a different ocean.

  9. Sheila says above – When people don’t buy, manufacturers don’t make. When manufacturers don’t make, they don’t hire workers (or keep the ones they have).

    Unfortunately one of the root causes of Income inequality is, we no longer manufacture here in the USA the vast majority of the products consumers buy. The fall out is former factory workers now have to take lower paying service industry jobs. Bottom line the 1% the oligarchy could care less. The 1% are profoundly indifferent to the 99% as long as they can make a profit today and off shore it to avoid US Taxes.

    Former President Carter recently stated concerning Citizens United Supreme Court decision – “It violates the essence of what made America a great country in its political system. Now it’s just an oligarchy, with unlimited political bribery being the essence of getting the nominations for president or to elect the president. And the same thing applies to governors and U.S. senators and congress members. So now we’ve just seen a complete subversion of our political system as a payoff to major contributors, who want and expect and sometimes get favors for themselves after the election’s over.”

    Bernie Sanders – “The Koch brothers, the second wealthiest family in America, plan to spend some $900 million in the coming 2016 election — more money than either of our major parties spent in the last election. That is not democracy. That is oligarchy. To restore our one person-one vote democracy, Congress must pass a constitutional amendment to overturn Citizens United and move toward public funding of elections.”

  10. We’ve gone in the blink of a geologic eye from few of us far between to the Holocene where humanity is the most distinct feature of the planet. There are consequences. One is that we can no longer be regarded as individuals but only as colonies, organizations, and institutions. Corporations, churches and religions, cities, countries, universities, audiences, movements, constituencies. All those things bump into each other often and require increasingly complex and coordinated interactions. Laws for example.

    Governance by country is no longer adequate to referee international friction or even commercial exchange thus our growing global government.

    Those who are uncomfortable with that are the Bruce/Caitlyn Jenners of the world born not fitting into reality. Some will fix the fit most are incapable of adjusting and will leave angry but everybody leaves one way or another.

    So we bump along, solutions lagging problems, but culture unfolding just adequate to the challenge.

    One cultural obsolescence is economics. Our demands for materials and energy and waste storage and labor skills are outstripping our supplies. Some have turned that stress into personal advantage and amassed great supplies of the currencies of the past and others have supplied the labor behind those suppplies but lost control of the value of what they produced. An unstable situation which will resolve itself either under control or chaotically.

    Many of us hope for a controled descent but there’s nobody but us to pull that off and there are also many of us promoting chaos from which power can be derived. Who’ll win?

    I don’t know. I just don’t know.

  12. Here’s an example of the problem:

    http://www.usatoday.com/story/news/politics/elections/2015/08/02/koch-2016-campaign-republicans/31017189/

    Listen to the Kochs. All freedom and individuality and American dreamy. So easy to fall for if you’re the type that falls for celebrity rather than content and accomplishment.

    Look at the hoard of Republican candidates sucking up to the Koch trough. Consider this. Would the country even be standing today if any one of them had followed Bush/Cheney? I don’t think so.

    Democracy hog tied by celebrity and the snake oil carnival barker that we invite into our living room daily.

    Think of all of the lives whose ultimate gift to us would be rendered meaningless if we loose at this point in history. Gave up real freedom for their illusion of freedom. Gave up rule of law for rule of celebrity. Gave up our Constitution for the Bible like the Middle East has. Gave up the power of wisdom for the power of guns. Gave up education to the seduction of mindlessness.

    Our choice.

  17. The Air Controllers stood and fell alone. If there were picket lines, there was no CIO/NFL to come to their aid. The A/C pilots union abandoned them. The demise of the brotherhood was doomed. One by one, the trade unions were destroyed.

    Now we have no apprenticeships, no journeymen and no teachers. It’s all available on line or at Walmart.

    Speaking of gladiators; The Coliseum was the first to built for the sole purpose of distracting the populace. It worked then. It is working now.

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