PLEASE READ this very important column on the consequences of income inequality. It’s by John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.
The fiscal cliff is approaching fast. Everyone knows it is coming but still no compromise. If we go over the cliff, it will compromise the short-term health of our economy.
Meanwhile, our country is heading toward a more dangerous cliff. Not everyone is aware how excessive inequality has become. Income inequality in the United States is now at levels last seen just before the Great Depression.
Extreme inequality could send us over a social cliff. The long-term health of our economy is in jeopardy.
Researchers are making a compelling case that excessive inequality weakens economic growth. Last year the International Monetary Fund (IMF) issued a report titled Inequality and Unsustainable Growth: Two Sides of the Same Coin. The report concludes that inequality is “a significant hazard to growth sustainability.”
Inequality is not just a problem facing the poor, and the shrinking middle class. The economic growth that enriched the top 1 percent over the past three decades is in peril.
Nobel Prize in Economics recipient Joseph Stiglitz reports on the growing consensus in The Price of Inequality: How Today’s Divided Society Endangers Our Future. He asserts “The bottom line, though, that higher inequality is associated with lower growth – controlling for all other relevant factors – has been verified by looking at a range of countries and looking over longer periods of time.”
Opponents of raising taxes on the wealthy try to stake the claim that slightly higher tax rates will discourage investment. There is a striking lack of evidence to support that position. The evidence is that excessive inequality is the real disincentive to investment and work.
In May of this year the Center for American Progress issued a report titled The American Middle Class, Income Inequality, and the Strength of Our Economy: New Evidence in Economics. They state “Strong empirical evidence in economics and other social sciences suggests that the strength of the middle class and the level of income inequality have an important role to play for… boosting productivity and spurring investment.”
One of the great success stories of the United States economy has been worker productivity. The problem is that over the past three decades workers have not enjoyed the fruits of their labor. Sixty percent of the income gains went to the top 1 percent. In the first year of recovery after the Great Recession, the top 1 percent got 93 percent!
Cornell University Professor of Economics Robert Frank has studied the consequences of inequality for many years. In Falling Behind: How Rising Inequality Harms the Middle Class he writes: “over time, countries tend to grow more rapidly during periods of low inequality than they do during periods of high inequality.”
The last time income inequality was as extreme as it is now was just before the Great Depression. The Great Depression was followed by a period of improving economic equality that economists call the Great Compression. Then, ushered in by Reaganomics, our economy fell into the Great Divergence of increasing inequality.
During the three decades of equality starting in 1950, the economy grew by 217 percent. During the subsequent three decades of increasing inequality, the economy grew by only 120 percent.
In assessing the root causes of the Great Recession, Robert Reich observes: “When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we’ve seen, ends badly.” Reich was Secretary of Labor under President Clinton. During the Clinton administration there was a modest increase in tax rates, economic growth was solid, and the budget was balanced.
When inequality is severe, low and middle-income consumers can no longer afford to demand products. Back in 1929, lack of demand due to inequality was a significant contributing factor to the Great Depression.
During a 60 Minutes interview, Federal Reserve Chairman Ben Bernanke said that the gap between rich and poor “Is a very bad development… it leads to an unequal society, and a society which doesn’t have the cohesion that we’d like to see.”
As described in the IMF report: “… too much inequality might be destructive to growth. Beyond the risk that inequality may amplify the potential for financial crisis, it may also bring political instability.” Another paper that summarized the research in this area reported: “Income inequality increases social discontent and fuels social unrest. The latter, by increasing the probability of coups, revolutions, mass violence or, more generally, by increasing political uncertainty and threatening property rights, has a negative effect on investment and, as a consequence, reduces growth.”
Some criticized the Occupy Wall Street protesters for lacking focus. When inequality gets bad enough marginalized protesters take to the streets with disruptive focus and destructive force. During 2012, in Madrid, Cairo, and many cities around the world, the potential for disorder was demonstrated.
So far, stability in the United States has benefited from the myth of upward mobility. As inequality becomes increasingly extreme, that illusion will give way to instability.
This column is not a call for fairness for the 99 percent. It is a warning of dire problems that will affect 100 percent of us. It is a warning the top 1 percent should heed.
The fiscal cliff will result in everyone’s taxes going up. It will result in immediate and indiscriminate cuts to the social safety net. The most vulnerable will be hurt the most.
The social cliff will result in growth and incomes going down. Those with the most to lose may be the ones who lose the most.
This column is a warning to policymakers as they consider how to resolve the fiscal cliff. Continued insistence on preserving historically low tax rates on high-income earners will increase inequality even further. Deep and immediate cuts to vital social programs will do little to decrease and may even increase the deficit.
The short-term effect of the wrong policy prescriptions will be another recession. The long-term effect could be a prescription for sending us over the social cliff with a frayed bungee cord.