Monday, November 24, 2014

Economic Double Whammy: America's Growing Wealth Divide Is Actually Putting People out of Work

Those who have studied economic patterns for several centuries have found that high rates of inequality lead to severe economic declines, usually only ending when there is a big war.¤t_page=1

By Lynn Stuart Parramore
November 20, 2014

Barry Z. Cynamon, currently Visiting Scholar at the Federal Reserve Bank of St. Louis, and Steven M. Fazzari, Professor of Economics at Washington University in St. Louis, are researchers on consumer behavior and how it effects the economy.


It turns out that the rise of the income share of high-income households begins at almost the same time as the rise in debt that was the focus of our earlier research. It seemed likely that this correspondence was not a coincidence. I began to see a common thread between the dynamics of inequality and the macroeconomics of U.S. expenditure.

LP: An ordinary person on the street would probably say that if the rich have most of the money, that’s bad for the economy. She’d intuit that if the rest of us don’t have enough money in our pockets to spend on goods and services, the overall economy will suffer. Yet this has been minority view in the field of economics. In fact, many economists have long argued that economic inequality was good for economic growth. What explains the persistence of the conventional view?

SMF: The person on the street typically understands that consumer spending is the source of business sales, and if consumer spending falls then businesses will sell less, produce less, and support fewer jobs. As your question suggests, it is also intuitive that rich households will spend a smaller share of their income. So, the person on the street can appreciate that as more and more income flows into the hands of the rich, it will become more difficult for the economy to generate the sales it needs to support job creation.


Our works shows that this is not so. We find that high and rising inequality is now holding back the U.S. recovery from the Great Recession and the lack of purchasing power faced by most people is a job killer not just for a few quarters but also over a number of years. Unemployment may cause wages and prices to fall (or at least rise more slowly), but disinflation and, especially, deflation are not likely to raise total spending. Of course, consumers appreciate lower prices for the things they buy, but lower wages are bad for spending, especially if the household has a fixed mortgage or car payment to meet.


LP: How does our sense of fairness and justice evolve in view of this growing inequality; this sense that the hard work of the many is supporting the luxury spending habits of the few?

Barry Z. Cynamon: Humans have achieved incredible things on this planet not just through our use of tools but through cooperation. E.O. Wilson tells us that humans are one of roughly 20 species known to be “eusocial” — that means we live in multigenerational communities, practice division of labor, and show willingness to sacrifice some of our personal interests to that of the group. Regardless of the debate about kin selection versus group selection, it is widely agreed that we have conquered the planet by cooperating with one another in spite of universally present instincts toward survival and self-interest. Our elaborate, interlocking systems of social norms, laws, and concepts of fairness and justice collectively bolster that underlying trait of eusociality so that what once enabled survival and propagation of small bands of humans has also enabled vast civilizations—including the unprecedented global human civilization of which we are all part today.

Fairness is central to this incredible history of cooperation. If we lose our trust in the legal system and the legitimacy of the market, then we will lose trust and cooperation. When that happens, it is not good. Societies that lose their trust end up looking more like Somalia, Iraq, or Sudan than like Sweden, Canada, or Australia. The point is not that the U.S. is one election or financial crisis or a few percentage points of income concentration away from becoming an ungovernable state. Rather, the point is that social infrastructure makes a huge difference, and it is not something that we seem to understand well enough to reliably manipulate it for good.


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