Introduction: What We’re Learning About Economic Equality and Growth

Why more equality means more prosperity.

We’ve all seen the grim signs. At the personal level, more and more families are losing ground as they struggle to reach, or remain, in the middle class. At the national level, sluggish economic growth isn’t producing good new jobs for our young people, or preserving good jobs for mid-career workers. The two—growing inequality and anemic growth—are intimately connected.

This issue of the Washington Monthly examines the effects of this long-brewing but only recently recognized crisis—and sets out some concrete solutions. Working with the Washington Center for Equitable Growth, the magazine takes a comprehensive look at how slow growth and inequality are combining to threaten the current and future livelihoods of children, students, young workers, families, and retirees. Brief articles will take you through the life cycle of U.S. families, showing that at every stage—from early childhood through education and working years to retirement—the two goals of human development and economic growth work together. And in each article, we offer specific policy proposals that could well make life better for U.S. families now and create a more vibrant future for the economy as a whole.

But first, let’s take an overall look at the problem.

Figure 1: Share of the nation’s total personal income going to the top 1 percent wealthiest Americans.

More and better economic research now documents that high and growing economic inequality is affecting our nation’s economic growth, and even its stability. Some of the newest research uses large microeconomic data sets to understand how the distribution of income affects the mechanisms that propel economic growth—mechanisms that Americans across generations must rely on as they try to start healthy families, raise children, get ahead in their careers, and retire in comfort. The economic story that is emerging doesn’t look promising—high inequality seems to be associated with less economic growth and more instability.

Certainly, inequality is associated with less family economic security. Case in point: Differences in wealth became even starker than income differences over the past four decades, with the top 5 percent of wealth holders distancing themselves from the rest of society by orders of magnitude. Just before the Great Recession, the average member of the top 5 percent was worth $1.57 million, compared to an average net worth between $95,500 and $360,000 for each member of the middle class, and a paltry $6,700 for those in the bottom 25 percent.

In order to understand what is going on in our economy, we have to look first at the specific channels through which inequality affects economic growth and stability and then at what’s changed over the past half century. Rising income inequality, for example, crimps the customer base that supports businesses large and small. And the growing inequality of wealth makes it harder for fledgling entrepreneurs to bring good ideas to the market. Similarly, the education achievement gap between the children of the wealthy and the rest of us is widening, and will lead to future declines in productivity. These trends do not bode well for new U.S. generations as they enter the workforce and begin to save for retirement.

Two sets of numbers tell us what’s happening to American families. The first is from economists at the Equality of Opportunity Project, including Raj Chetty and Nathaniel Hendren from Harvard and Emmanuel Saez and Patrick Kline from the University of California, Berkeley. They analyzed data from the Internal Revenue Service and other sources providing mobility data and a variety of other useful measures for the U.S. Their finding? Mobility nationwide between the 1970s and today is essentially flat—in essence, more and more of us wind up not realizing the American Dream of moving up the economic ladder from the rung on which we were born.

The second set of numbers details the sharp rise in income inequality over this same period. UC Berkeley’s Saez documents the share of pretax income going to the top 1 percent of U.S. taxpayers; the number has risen from almost 9 percent in 1970 to 20 percent in 2012, the last year for which complete data is available. The nonpartisan Congressional Budget Office shows that over roughly the same period, the share of so-called transfer income—the percentage of after-tax government funds directed at alleviating the consequences of inequality among low-income families—fell from 54 percent to 40 percent.

Rising economic inequality. Stagnant social mobility. The reason for both trend lines is clear: as the wealthiest among us have corralled more of the national income over the past forty years, this monied elite has used its growing power to carve out more and better ways to secure more and more of the nation’s wealth. And make no mistake: government policies are an important reason that average wages, adjusted for inflation, have remained flat, or even fallen, over these decades, while the top income earners have accumulated ever-rising wealth. Policies designed to emasculate unions amid rising global competition enable serial tax cuts for the very wealthy, unleash Wall Street to restructure our businesses while saddling them with massive debt—and then carry that lucrative financing model into the very heart of our economy, our home mortgage market—all contributed to growing economic inequality and anemic social mobility.

Harvard University economist Nathaniel Hendren calculates the so-called social costs of this rising income inequality, finding that more money accruing to the wealthy reduced income growth over the past four decade by an estimated 20 percent, for a total social cost of $400 billion in 2012. Social costs are calculated by measuring the value of a dollar’s worth of income to individuals across the income spectrum—a dollar being less important to a wealthy person compared to a low-income individual—to discern the impact of income inequality on income growth. Basically, as the wealthy vacuumed up more and more of the income gains in our economy, the rest of us had less and less to spend.

The American middle class, unfortunately, tried to cope by turning to debt. Economists Amir Sufi at the University of Chicago and Atif Mian at Princeton University have detailed the explosion of household debt over this same period, particularly in the run-up to the Great Recession of 2007-09, as average U.S. households borrowed to make up for depressed incomes. Except for the upper tier of Americans, families have had to borrow more to pay for their homes, their kids’ education, their health crises, and their fleeting emblems of prosperity: new cars, dishwashers, family vacations. More and more women entered the workforce over this period and families put in more hours at work, yet income gains were paltry and families struggled to keep pace with inflation. This sudden rise in debt among so many struggling families and the collapse of the housing bubble were at the root of the recession.

No wonder living the American Dream seems so unattainable today. Most of us are following in the footsteps of the Greatest Generation and the Silent Generation, who were born amid the tumultuous times of the Roaring Twenties, the Great Depression, and World War II and then, with their Baby Boomer children, experienced the Golden Age of postwar America. For members of Generation X (1965-1980), the Millennials (1981-2000), and the so-called Boomlets, or Generation Z (born in the twenty-first century), those golden years of opportunity and security are history.

These shocks to working- and middle-class families were not completely evident over the past four decades. Now, however, accumulating economic research allows us to examine the broad failures of economic policy over most of this period. The available evidence also allows us to examine how economic inequality and slower growth may well go hand in hand, and to ask whether more equitable economic growth—allowing more Americans to enjoy the fruits of progress—could well lead to more sustained, inclusive economic expansion.

This new research—studies grounded in facts that identify the real problems facing our society—could enable policymakers to reboot the American Dream for the majority, and not just for a tiny elite. These policies, the research shows, aren’t just good for families; they are fundamental to creating a strong, competitive economy.

The magazine you are reading—our special package on equitable growth—charts this research in the form of a trip across a generational arc of Americans: from the soon-to-be-born to the elderly, with stops along the way for primary and secondary students, college students, the young working class, today’s young families, and Baby Boomers heading into retirement.

At each step of the way, we examine new research that highlights

  • the incredible importance of prenatal and early childhood health care and extremely early childhood education;
  • the negative educational effects of economically segregated schools;
  • the gaps in post-secondary education and workforce training programs that are depriving businesses of the skilled workers they need;
  • the startling economic effects of growing work-life conflict in families;
  • the steady increase of personal debt, crimping economic growth, and accelerating inequality; and
  • the grim prospects for those nearing or entering retirement without enough savings to guarantee dignity in their final years, along with the fiscal unsustainability of the programs that underlie American retirement.

None of these outcomes, however, is predestined. Policies matter. In each section, we explore policy options that could reverse rising inequality, create more sustained economic growth, and restore social mobility.

Our proposals are grouped by their place in the generational progression—from prenatal care through the working years to retirement. They should be the start of a serious discussion in Washington and in statehouses across the country about fresh economic policies—no longer hamstrung by stale arguments about supply-side economics or the welfare state. New economic research on equitable growth is rendering moot the old rhetoric behind political stalemate.

It’s time we moved on. We know how to create an economy that works for everyone. Let’s get to work.

Return to “American Life: An Investor’s Guide.”

Heather Boushey

Heather Boushey is executive director and chief economist for the Washington Center for Equitable Growth.