In a Few Short Years, Mainstream Economists Have Gone From Assuming Runaway Inequality Is Harmless to Understanding that It Cripples the Economy

But Bad Government Policies Are Making Inequality Worse By the Day

AP reported last December:

Economists appear to be increasingly concerned about the effects of inequality on growth. Brown, the Raymond James economist, says that marks a shift from a few years ago, when many analysts were divided over whether pay inequality was worsening.Now, he says, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”

As one example, Paul Krugman used to doubt that inequality harmed the economy. As the Washington Post’s Ezra Klein wrote in 2010:

Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.

Krugman wrote in the New York Times:

The discussion has shifted enough to produce a backlash from pundits arguing that inequality isn’t that big a deal.

They’re wrong.

The best argument for putting inequality on the back burner is the depressed state of the economy. Isn’t it more important to restore economic growth than to worry about how the gains from growth are distributed?

Well, no. First of all, even if you look only at the direct impact of rising inequality on middle-class Americans, it is indeed a very big deal. Beyond that, inequality probably played an important role in creating our economic mess, and has played a crucial role in our failure to clean it up.

Start with the numbers. 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.

Beyond that, when you try to understand both the Great Recession and the not-so-great recovery that followed, the economic and above all political impacts of inequality loom large.

***

Inequality is linked to both the economic crisis and the weakness of the recovery that followed.

Indeed, a who’s-who of prominent economists in government and academia have now said that runaway inequality harms economic growth, including:

  • Former U.S. Secretary of Labor and UC Berkeley professor Robert Reich
  • Global economy and development division director at Brookings and former economy minister for Turkey, Kemal Dervi
  • Societe Generale investment strategist and former economist for the Bank of England, Albert Edwards
  • Michael Niemira, chief economist at the International Council of Shopping Centers
  • Former executive director of the Joint Economic Committee of Congress, senior policy analyst in the White House Office of Policy Development, and deputy assistant secretary for economic policy at the Treasury Department, Bruce Bartlett
  • Deputy Division Chief of the Modeling Unit in the Research Department of the IMF, Michael Kumhof

Even the father of free market economics – Adam Smith – didn’t believe that inequality should be a taboo subject.

Numerous investors and entrepreneurs agree that runaway inequality hurts the economy, including:

Indeed, extreme inequality helped cause the Great Depression, the current financial crisis … and the fall of the Roman Empire . And inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America. (More stunning facts.)

Bad government policy – which favors the fatcats at the expense of the average American – is largely responsible for our runaway inequality.

And yet the powers-that-be in Washington and Wall Street are accelerating the redistribution of wealth from the lower, middle and more modest members of the upper classes to the super-elite.

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  • John

    For Gd’s sake…THERE IS NO SUCH THING AS “MIDDLE CLASS”. This simply does not exist, EVERY serious statistician or person who has the correct figures knows it. This expression is just around to make you believe that you (or most people) belong to it or could belong to it, so that there is not so much inequality after all. BUT THIS IS NOT THE CASE. Most people has far below and even the average salary does not reflect reality.

    Please do not use this expression anymore.

  • Coleman Broadhurst

    The remnants of middle America are taking it in the face on their way down to new experiences in basic survival. There are economists, whom, for more than 35 years, have demonstrated the looting. Krugman’s chicken scratch is widely read simply because he doesn’t dare offend the status quo, which makes him far game for the so-called opposition to take pot shots at his corporate column.
    Any real revolutionaries are not going to be broadcast or even well known on the Web Inc.
    The greatest success of the status quo has been to 1.) outright ignore the problem 2.) blame the problem on the victims themselves 3.) ignore the problem by saying business cycles, lack of education, training or the weather cause inequality 4.) making up horse about “structura”l problems to cover for violnet big business practices 5.) and the biggest lie of all, that rising levels of inequality are a problem, rather then an end goal in itself, of predatory capitalism.

    Who sees big banks or corps complaining that the economy is being “crippled”? War profiteers never had it so good in the age of the police state.

  • guest

    The number of unemployed and ” work force non participants ” is about 1/3 of the working age population at about 100,000,000 Americans. Many of the ” employed ” are in minimum wage or part time jobs. Tens of millions of these people are receiving food stamps, welfare, unemployment, medicare. Medicaid, Social security etc. or some form of welfare or entitlement yet are written right out of the economic indicators . They still exist. They still vote. They are written out of the U-3. There vital food and energy costs are written right out of the Consumer Price Index. It’s just now dawning on all these Nobel Laureate wannabe’s that the economy is never going to create 100,000,000 jobs, even minimum wage jobs, even if they would take them. How many years of college and professional practice did it take for them to realize what my mailman could have told me 5 years ago.

  • Truth Teller

    Occupy was telling the truth.

 

 

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