Growing Income Inequality Is Destroying Our Economy and the Middle Class

This morning, Alan Krueger, Chairman of the President’s Council of Economic Advisers (CEA), gave a speech at the Center for American Progress.  We can only hope that his remarks hopefully portend the administration’s actions with respect to future economic policy.  Here is a summary of his most salient points:

  • The difference in income growth between very wealthy and the rest of the population in the U.S. over recent decades is staggering, as illustrated by the following chart:
  • This gap is further underscored by contrasting income growth in post World War II decades with the numbers from 1979 through 2007:
  • The period from 1992 to 2000 was an exception, when strong economic growth and the policies of the Clinton administration led all quintiles to grow together again. All income groups experienced their fastest income growth in years. That there is nothing in these data to indicate that the tax increases in the early 1990s had any adverse effect on income growth. Had incomes grown since 2000 like they did in the 1990s, the median income would be $8900 higher than it is now:
  • The share of all income accruing to the top 1 percent increased by 13.5 percentage points from 1979 to 2007. This is the equivalent of shifting $1.1 trillion of annual income to the top 1 percent of families. Put another way, just the increase in the share of income going to the top 1 percent over this period exceeds the total amount of income that the entire bottom 40 percent of households receives. (emphasis added)
  • The evidence is clear that the economy performed more poorly after last decade’s tax cuts than it did after taxes were increased on top earners in the early 1990s. Across all businesses, job growth was much weaker in the 2000s than in the 1990s. Hence there is little empirical support for the claim that cutting taxes on so-called “job creators” has spurred income growth, business formation or job growth.
  • According to research by Karen Dynan and her coauthors, the top 1 percent of households saves about half of the increases in their wealth, while the population at large had a general savings rate of about 10 percent. This implies that if another $1.1 trillion had been earned by the bottom 99 percent instead of the top 1 percent, annual consumption would be about $440 billion higher. This would have resulted in a 5 percent boost to aggregate consumption over what actually occurred. (emphasis added)
  • A paper by international economists Torsten Persson and Guido Tabellini argued that in a society where income inequality is greater, political decisions are likely to result in policies that lead to less growth. A new IMF paper also finds that more equality in the income distribution is associated with more stable economic growth.
  • If we want an economy that builds the middle class, we can’t continue the type of policies that have exacerbated the rise in inequality and threatened economic mobility for the last thirty years. This means that we must adequately regulate excess risk-taking and corrupt practices in financial markets. It also means that we can’t continue tax policies that don’t generate faster economic growth or jobs, but rather increase inequality. Instead of going backwards, we should adhere to principles like the Buffett Rule, which states that those making more than $1 million should not pay a lower share of their income in taxes than middle class families. We should also end unnecessary tax cuts for the wealthy, and return the estate tax to what it was in 2009.  (emphasis added)
  • The evidence suggests that a growing middle class is good for the economy, and that a more fair distribution of income would hasten economic growth. Businesses would benefit from restoring more fairness to the economy by having more middle class customers, more stable markets, and improved employee morale and productivity.

“Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand. They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different.”

F. Scott Fitzgerald, The Rich Boy

Kudos to Ezra Klein of the Washington Post for his original posts and the others cited above for their work.  Also to Scott Fitzgerald for nailing down what rich people are really like long before I was born.

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