Even Big Business Sees the Problem of Income Inequality

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.”

11 thoughts on “Even Big Business Sees the Problem of Income Inequality

  1. So, S&P finally notices what The Who’s deaf, dumb, and blind Tommy has known for the past 40+ years – the middle class has been eroding.

    Only, now it’s not just erosion – it’s a landslide!

  2. Ok, now, what do we do about it.

    I’d like us to stop well short of tumbrel’s, drawing-and-quartering, then putting the guillotined head on a pike.

    But, will “The Malefactor’s of Great Wealth” do something to save their own skins?
    Or, will they hunker down in their gated communities, counting their money, while being guarded by their own private militaries?

  3. There’s possibly more going on.

    One of the causes of the mortgage crisis was that there simply weren’t enough attractive investments for people. So investments were created with higher risk and nominal higher returns.

    Now: if the billions of dollars sitting idle, waiting for the investment in some “more attractive investment” were held by middle income (or lower-upper income), there would be people thinking about business startups and such. But if you’re a billionaire, you don’t want to see if you can open the worlds best damn pizza parlor, or your own salon, or whatever.

    So investment money – which is supposed to be what’s “good” about being wealthy – didn’t actually go to new products and services, but just started looking for ways to make money.

    Shorter version: I think you have a damn good point, but I also think it extends more than “Mr. and Ms. (Or Mr. and Mr./Ms and Ms.) middle class didn’t take a fun vacation and spend money on tchotchkes and restaurants and such, or buy a new car they didn’t really *need*, or…”. I think it might well infect the business world more generally.

  4. What to do?

    Seek a ‘contradiction within the ruling class’ – i.e. find rich sociopaths willing to sell out their fellow sociopaths. Your best bet is the smart but weak ones. Ally with them, but watch out.

    That’s tactics. For strategy, hone your arguments, your plans and your wits.

  5. Being kicked in the wallet hard in 2008 turned a friend of mine (a financial planner) from a Reagan-loving Bush supporter into a guy who simply will not vote for any Republican, instead voting for whoever has the best chance of defeating the Republican. That’s what it takes for many of these people, and it’s good that it’s starting to happen and that they’re waking up to it.

    I’d prefer they were there already due to empathy, but empathy is not their strong suit.

  6. In Dalton Trumbo’s book Johnny Got His Gun there is a passage where Johnny says, ‘they’ve put me back in the womb.” Economically speaking, the same sentiment would hold true for me.

  7. The terrible thing is that this was common knowledge in the 1930s. Arguments in favor of getting money to the less well off who would spend it immediately were all over magazines like Fortune. (Granted, Fortune considered itself progressive in the sense that industry was progressive because it was able to feed, clothe and house everyone comfortably thanks to its rising efficiency. Let’s face it. Those were progressive goals, and industrial progress was making them reachable.) The big campaign against this kind of common sense economic reasoning was pushed by the immense right wing propaganda effort of the 1970s and 1980s to the point that people forget the obvious and are only now rediscovering it.

    P.S. Most sensible people have also realized that when there is nothing to invest in, it is time to buy stocks and other financial instruments. I’ve made a fair bit of money out of this strategy, though, to be honest, I would rather have made it by backing companies that provided goods and services.

  8. Kaleberg,

    What I meant by chasing investments was that there simply isn’t enough stock out there. All the “good” picks have more or less hit their price, no bargains to be bought, you own as much of X_Company stock as you want. Sure, there were some penny stocks that might be worth backing, but their entire market capitalization was only a couple million, and not worth the effort of scoping out their business plan to see if it was a worthwhile investment. (Or it might be a pension fund manager who can’t make a risky investment like that for fear of violating the prudent expert fiduciary standard).

    The financial services industry, in a healthy economy, is tight because it’s a very simple service and you expect profits to be competed away (“Oh, you don’t need them to do your IPO, we can run it a bit cheaper for you!”). But that’s not what’s happening, and it might be due to ballooning wealth. And with all that wealth up top, there’s more money chasing money for the sake of money, rather than the real purpose of financial services – helping connect people with some savings to invest to people who have a decent business but can’t expand without funding.

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