Is Income Inequality Actually Hurting the U.S. Economy?November 12, 2013
It must be a reflection of either politics or economics — or both — that banks and other investment firms are now sending me research reports on income inequality. I have already written about JPMorgan’s analysis of quantitative easing and inequality: ”The Fed’s policies are likely exacerbating wealth inequality, but they are almost certainly reducing income inequality, particularly when measured as disposable income.”
And now Toronto-based Capital Economics takes a shot at the topic with a report titled: “Income inequality is not holding the economy back”.
The core of the firm’s analysis looks at the theory that (a) since the 1% appear to be grabbing an ever-greater share of income gains in recent decades, then (b) rising income inequality should slow economic growth because they rich have a higher marginal propensity to save than those lower down the income distribution so (c) there would be less consumer spending. Economist Paul Ashworth:
It is true that those in the lower half of the income distribution would be forced to reduce their own savings but, overall, we would expect to see a rise in saving at the macro level As well as a rise in the overall rate of saving among households, we would also expect to see consumption shrinking as a share of overall GDP.
So is that what the data show? Not so much. Ashworth:
At the macro level, the household saving rate has actually fallen over the past few decades and consumption still accounts for a bigger share of overall GDP. If rising inequality was holding the economy back we would expect to see the exact reverse happening. … That suggests rising income inequality has not been a dominant macro force.
To that conclusion, I would add this one from Scott Winship:
Recent work by Harvard’s Christopher Jencks (with Dan Andrews and Andrew Leigh) shows that, over the course of the 20th century, within the United States and across developed countries, there was no relationship between changes in inequality and economic growth. In fact, between 1960 and 2000, rising inequality coincided with higher growth across these countries. In forthcoming work, University of Arizona sociologist Lane Kenworthy also finds that, since 1979, higher growth in the share of income held by the top 1% of earners has been associated with stronger economic growth across several countries.
Likewise, there is good reason to dispute the income stagnation argument and the the notion of a multi-decade disconnect between productivity and wages. This is a complex topic, to be sure, with tricky data sets. And there may be reason to worry about inequality from job polarization in the coming decades. But some partisan policymakers are using a faulty reading of past data to make recommendations about tax and regulatory policy today. Caution is warranted.