Browsing the blog archivesfor the day Wednesday, August 6th, 2014.


Even Big Business Sees the Problem of Income Inequality

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economy

I’m no economist. What I know about economics I got from a long-ago econ 101 college course I don’t actually remember, except that I know I took it, and reading Paul Krugman’s column. But it just makes intuitive sense to me that widespread income inequality chokes off economic growth. When a growing percentage of the population is just squeaking by, or not even that, then a growing percentage of people are not spending money on new consumer products, or taking vacations, or leaving money in the bank in the form of IRAs or money market funds or anything else.

And when an increasing amount of a nation’s wealth is hoarded by a relative handful of the mega-rich, those hoarded dollars are not necessarily ever going to be spent within the home country. They could be spent elsewhere, or just kept hoarded. So this sort of situation naturally leads to fewer and fewer dollars in circulation within the country in question. By extension this leads to fewer and fewer jobs as demand drops for goods and services fewer people can afford. And I don’t care if you call that Keynesianism for something else. It makes plain sense, and I’ve ever heard a persuasive argument against it.

Now Standard & Poor’s has issued a report called “How Increasing Inequality is Dampening U.S. Economic Growth, and Possible Ways to Change the Tide.” To which I say, duh.

Neil Irwin writes,

I asked Beth Ann Bovino, the chief U.S. economist at S.&P., why she and her colleagues took on this topic. “We spend a lot of time trying to think about what’s the economic outlook and what to expect ahead,” she said. “What disturbs me about this recovery — which has been the weakest in 50 years — is how feeble it has been, and we’ve been asking what are the reasons behind it.” She added: “One of the reasons that could explain this pace of very slow growth is higher income inequality. And that also might explain what happened that led up to the great recession.”

“From my research and some of the analysis I saw from others, when you have extreme levels of inequality, it can hurt the economy,” she said.

Because the affluent tend to save more of what they earn rather than spend it, as more and more of the nation’s income goes to people at the top income brackets, there isn’t enough demand for goods and services to maintain strong growth, and attempts to bridge that gap with debt feed a boom-bust cycle of crises, the report argues. High inequality can feed on itself, as the wealthy use their resources to influence the political system toward policies that help maintain that advantage, like low tax rates on high incomes and low estate taxes, and underinvestment in education and infrastructure.

Duh, S&P. I’m glad you came out and said this, but it’s rather pathetic that it needs to be said. As for the hoarding mega-rich, there’s an old fable about a goose and golden eggs they might want to review and reflect upon. I would add that there is nothing inherently “pro-business” in government policies that favor the wealthy. In the long run, encouraging inequality is anti-business.

See also “U.S. policymakers gird for rash of corporate expatriations.”

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