Inequality Kills Growth

Part of the basic conservative economic world-view in this and other countries is the belief that growth is entirely produced by owners of capital deploying resources to people and activities the market has deemed valuable, with minimum interference from taxes and regulations imposed by government or wage demands made by workers. Even for those who don’t buy the whole ideology, the suggestion of a perpetual zero-sum tradeoff between growth and equality is powerful, particularly in societies (like ours) with a predisposition to think of wealth and virtue as being closely correlated. How much equality can we afford, we are constantly if implicitly asked?

But there’s growing evidence that inequality is at present the deadliest threat to long-term global economic growth. Here’s investment guru (and chairman of the president’s Global Development Council) Mohamad El-Erian summing it up:

[M]ost countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences. Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity.

Given that affluent households spend a smaller share of their incomes and wealth, greater inequality translates into lower overall consumption, thereby hindering the recovery of economies already burdened by inadequate aggregate demand. Today’s high levels of inequality also impede the structural reforms needed to boost productivity, while undermining efforts to address residual pockets of excessive indebtedness.

Thus we have fears of “secular stagnation,” of a slump in consumer demand, growth and productivity that is no longer cyclical, which can become a self-fulfilling prophecy if investors come to believe in it.

So much for buying off the owners of our economy to keep us all employed by giving them an ever-higher-share of wealth! So much for erecting golden calves of entrepreneurial hero-worship to show our appreciation to “job-producers!” In the end they can’t really function without help from us peons.

It used to be a boilerplate argument against “class warfare” to claim that we’d all do better with unequal “slices” of a bigger “pie” than we would be redistributing existing resources. But the more we know, the more it appears those who hoard large “slices” are the ones shrinking the “pie.”

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.