Say It Loud: Inequality is Bad for Everyone

Posted by Sarah Treuhaft on December 22, 2014

 

 

There is an invisible culprit in the great scandal of inequality in America: your Econ. 101 textbook.

Go ahead, dig it out from that storage chest, and undoubtedly you’ll read that inequality, while we might not like it, is good for economic growth and progress. This idea has undergirded decades of policymaking, and is still widely accepted by the public and elected officials making decisions about whether and how to invest in housing, transportation, education and the other elements of healthy, thriving communities.

To make real strides toward an equitable economy, the paradigm must shift. Thankfully, a slew of new research is adding up to a serious takedown. And now it’s time for practitioners, advocates, and policymakers to apply this new economic thinking to gain broader support for strategies to build more inclusive communities.

Two economists figure prominently in the textbook story about inequality and growth: Simon Kuznets and Arthur Okun. In the 1940s, Kuznets' theory of inequality and economic growth cast inequality as an inevitable growing pain of the development process. He said that as countries develop, inequality rises, but it then falls as growth takes off and standards of living rise. A few decades later, Okun, President Johnson’s chief economic advisor, released Equality and Efficiency: The Big Tradeoff. In it, he described how inequality creates positive incentives for people to work and invest, and made the case that policies to address inequality, while they might be socially desirable, will take a toll on economic growth.

For decades, these theories—perfectly aligned with ideas about trickle-down economic growth—dominated the field of economics and set the terms of policy debates. Yes, policymakers have the tools to do something about inequality, but it will cost us in growth. Better to invest in growth at the top that would eventually lift up those at the bottom.

Now a new consensus is emerging. Over the past several years, economists from mainstream institutions like the IMF, the OECD, even Morgan Stanley and Standard & Poor's are looking at the latest data and finding that inequality, far from promoting growth, has a dampening effect on it. And policies to increase equity and inclusion are not only the better moral choice—they are necessary to bring about growth that is robust, sustained, and shared.

The latest contribution comes from an OECD working paper released this month (full study here). Crunching the numbers on inequality and growth across 31 developed OECD countries, economist Federico Cingano found that rising inequality has a “negative and statistically significant impact on subsequent growth.” According to his analysis, GDP growth in the United States would have been 7 percentage points higher between 1990 and 2010 if inequality hadn’t increased.

Cingano also looked into what type of inequality mattered for economic growth: inequality at the top or inequality at the bottom? He found it was the widening gap between the poor and lower middle class (households in the bottom 40 percent of the income distribution) and everyone else that had the biggest negative impact on growth. In contrast, and countering the general focus on the 1 percent pulling away from the rest, the growth of incomes at the very top had no impact on growth.

The reason why inequality at the bottom stunted overall growth? Unequal educational opportunities. Children of parents with low educational levels do progressively worse in terms of educational attainment and skills as inequality levels rise, while inequality has no impact on the education of children from more educated families.

Instead of an equity-growth tradeoff, the analysis found that reducing inequality is a win-win all around. “Policies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth,” writes Cingano. He warns that focusing on growth alone, without thinking about who gains from it, could undermine growth in the long run.

Policy-wise, the paper advocates more equitable tax policies to ensure the benefits of growth are broadly shared (echoing a recent IMF study that said redistributive policies, when designed well, can be growth-enhancing). It also recommends policies to increase educational access and opportunity for low-income children and broad social investments to increase access to services, skills development, health care, and child care for low-income and vulnerable lower middle-class households.

This OECD analysis adds to the mounting evidence base that suggests it is time to rewrite those textbooks. But paradigms shift slowly, and the academic debate will no doubt continue. So, it is up to us doers to put this new knowledge about economics to work, and there is no time to waste. The crisis of inequality shows no sign of abating, and it is placing all of our communities at risk. So say it more and say it loudly as you promote strategies for racial and economic inclusion: inequality is bad for everyone.

(Graph courtesy of the Organisation for Economic Co-operation and Development OECD)

About the author more »

Sarah Treuhaft is director of Equitable Growth Initiatives at PolicyLink, a national research and action institute advancing economic and social equity. She leads the organization’s work on demographic change and the economy, collaborating with local and national partners on research and action projects that aim to build a more equitable economy. She manages the development of the National Equity Atlas (www.nationalequityatlas.org), a web-based data and policy tool produced in partnership with the USC Program for Environmental and Regional Equity.

If you like this article, please subscribe to Shelterforce in print or make a small donation to keep Rooflines strong.

COMMENTS

John Doe
4 Jan 15, 11:59 pm

And why is “growth” so important?

Dana M Jones
6 Jan 15, 9:24 am

The old theory was based on some assumptions about unemployment that the global economy has changed, particularly in America. When UI is above 4%, it negatively impacts wage growth and leaves millions struggling without income to purchase products. The impact is fewer sales kill growth.

When necessary items, fuel and food cost remain high, some markets do well. As they decline, they can stimulate production because of lower cost, but without buyers, what do we produce?.

New approaches must account for an international market place and not just the big bad America. Minimum wage has to rise for the American worker to be a consumer of more than shelter and food. The American living standards are high. Technology and innovation hubs are needed to promote small business development. High quality education is needed for our fastest growing populations, Latinos and Blacks. If not, the world’s biggest economy will get smaller.

Beth Lindsay Templeton
6 Jan 15, 10:24 am

If everyone in our community does not receive a first rate education, then who is going to take care of me and mine in the coming decades? If we don’t provide first rate, affordable and available healthcare for everyone in our community, who is going to be healthy enough to take care of me and mine when I need it? If we do not have appropriate safe and affordable housing for everyone with an inexpensive way to get to work, who is going to serve me at restaurants, clean the public facilities I use, and maintain the parks and paths that I enjoy? If we continue to tear down blighted neighborhoods without one-to-one replacement of the units that are torn down, then are we deciding that we want more homelessness in our community?  If we don’t have a strong, functioning, affordable and flexible transportation system, then how am I going to be able to get around when I can no longer drive?
If we don’t create a community where all of us can thrive, which of us will eventually succumb to being in the “loser” category rather than the “winner” category? If our community and each of us individually do not open our hearts, minds, and monetary priorities to include people who currently live in poverty, then what will our future look like? Will we still enjoy our lives here? 
This is the dilemma: we do not want poverty in our community because it makes us uncomfortable, it challenges those of faith about how faithful we are being, and it is simply ugly. And yet, we do not want to do what it takes to eliminate poverty because that’s just messy and may change us somehow!

Stan
6 Jan 15, 3:50 pm

If the 1% pulling away from the rest of us does less harm than the separation from the poor from the middle classes, at a time where the middle classes feel under economic siege (justifiably), then we preserve the “0 sum game” between the poor and middle classes that sank the war on poverty politically. Plus the 1% dominate the political system since they finance the election process, so their campaign contributions purchase policies that benefit them, not everyone else, including the middle classes and the poor. Until there are more jobs for educated people, those with power are not going to vote for more education for the poor which creates competitors at the expense of their own kids. The resources of America’s profitability must be divided more evenly and not concentrated in the hands of an ownership class.

Where are the facts?
7 Jan 15, 10:47 am

Which Econ 101 texts still spout the benefits of inequality? The most popular textbook, Principals of Economics by Mankiw has a whole chapter dedicated to eradicating poverty and inequalities and he is supposedly a conservative-leaning economist! The whole premise of the article is false, and the research cited is not ground-breaking; economists have been publishing similar studies for more than 30 years.

rhesa j
22 Jan 15, 9:45 pm

I agree with Stan, with respect to overly simple acceptance the idea expressed here:

” In contrast, and countering the general focus on the 1 percent pulling away from the rest, the growth of incomes at the very top had no impact on growth.”

This kind of numbers/correlate only reporting by economists creates loopholes in courage necessary to create real policy. 

The information on role of “educational attainment” as root of inequality is also behind the times reporting.  Thomas Shapiro and others at Brandeis are doing the best work to show that there is significant disparity in “Return on Education,” that means inequality persists even with equal attainment.

It is a good thing that traditional economic analysis houses (UofC folks) are acknowledging the downside impact of increasing inequality, but they are behind the curve in this shift and maybe should not be treated as the definitive source of quotes on the data.  smile

POST YOUR COMMENTS register or login