Rising inequality partly to blame for stagnant economy

Contributing Writer Contributing WriterOctober 25, 2012 

Are we better off today than we were four years ago? For too many people, the answer is no.

As disappointing as this fact is, it’s mostly due to the cycles that modern economies are prone to. Four years ago we had just passed a cycle’s crest; today we’re slowly climbing out of its trough. To compare these two periods is to contrast two points in the economy’s short term ups and downs.

This detail of course doesn’t make it any easier for those suffering through this cycle. It’s just that such a perspective doesn’t reveal much about the true direction in which our economy is headed.

Instead we ought to be asking about the economy’s longer-term trends. On this, both presidential candidates should be much more outspoken than they are. The fact that they aren’t speaking up is itself a sign of the underlying problem.

Fifty years ago, almost all of our nation’s households were still experiencing the prolonged economic boom that followed World War II. Income growth was especially rapid at the bottom – so much so that over a 10-year period beginning in the 1960s, the nation’s poverty rate fell from 22 percent to a record low rate of 11 percent (today it is 15 percent).

The 1980s ushered in the new era of slow and unevenly distributed growth that remains with us today. Since 1980 annual growth has averaged 2 percent or 3 percent. Yet incomes among the top 1 percent of households have risen by more than 300 percent, or 10 times faster than did the incomes of those in the bottom 20 percent of households. In fact the higher you climb in the income scale, the faster income growth has been.

Turning to the last decade, incomes in poor and middle-class households have hardly budged. Meanwhile, what growth that has occurred over the last few years has gone almost exclusively to the richest 1 percent of households. Their share of total national income has now grown to 20 percent, up from 10 percent in 1980.

Many people criticize such a spotlight on these stunning facts of growing inequality. It reflects envy, they say. Or it lacks an appreciation for the essential contributions the wealthy make.

Some would have us believe that the solution is to reduce tax rates for everyone – but especially for the wealthy since they’ll respond to the added income in their pocket by creating jobs.

But over the last 30 years, those at the top have never had it better in terms of opportunities to acquire wealth. Yet job creation and general prosperity haven’t followed. Instead we’re left with more rigid social classes with less social mobility across generations than used to be true.

There are good reasons to believe that rising inequality is partly to blame for these problems of growing social immobility and a stagnant economy that fails to fairly distribute gains. For one thing, citizens’ interests are more divided. As the middle class shrinks, the bread and butter middle-class politics that once was good for our country has been losing out.

We see fewer of the investments in education, infrastructure, health care and some crucial forms of social insurance that protected us from the unexpected shocks or unfortunate circumstances life throws our way. In the past, such policies made us more productive and collectively assured a broad distribution of economic gains.

A second way that inequality contributes to a more stagnant and unfair economy is that it tends to turn politicians into either unthinking defenders or critics of the status quo.

We hear about the wonders of low taxes, the power of small businesses and the vigor of our entrepreneurial spirit. Meanwhile others find it easy to tar just about anything by evoking the specter of “privatization,” “globalization,” “corporate America” or “Wall Street,” whether a logical connection exists or not.

Neither narrative gets us far in finding ways to reduce the built-in advantages the wealthy have gained through tax policy, lobbying and deregulation, nor does it advance the difficult conversation we must have about the need to shift public resources away from their current priorities – which include the elderly – and toward a new commitment to broad-based economic opportunity for all.

Katie Baird is an associate professor of economics at the University of Washington Tacoma. Email her at kebaird@ uw.edu.

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