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Saturday, January 21, 2017

Why A Strong Middle-Class Is Necessary For Growth

It’s great to get to watch the arguments against inequality in the United States being built in real time. In spaces ranging from political corruption to a lack of a serious, sustained response to the economic crisis, people are telling sharper and more critical stories about why inequality should be a concern for the country. Which is important, as inequality is not going away.

One of the spaces where this has been lacking is long-term economic growth. The research has been substantial, but few have collected and curated it into a set of arguments for why inequality is bad for the health of our economy. This is one of the more important battles. The normal assumption is that inequality helps everyone by allowing the economic pie to grow as big and as quickly as it possibly can. The background thought animating this is that there’s a serious tension between efficiency and equality – to support equality is to necessarily sacrific economic efficiency.

Heather Boushey and Adam S. Hersh from the Center for American Progress have a new paper out, The American Middle Class, Income Inequality, and the Strength of Our Economy New Evidence in Economics, that summarizes the case for why inequality can damage the economy. They start by reviewing the literature trying to link income inequality and growth, and find that the link is, if anything, in the other direction. “Roland Benabou of Princeton University surveyed 23 studies analyzing the relationship between inequality and growth. Benabou found that about half (11) of studies showed inequality has a significant and strongly negative affect on growth; the other half (12) showed either a negative but inconsistently significant relationship or no relationship at all. None of the studies surveyed found a positive relationship between inequality and growth.”

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