Tag Archives: consumer spending

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.