Economists once thought that economic inequality was a side
effect of economic growth, but today, they are coming to believe
that it fosters less stable economic expansions and sluggish growth.
Income inequality in the United States has soared to the highest
levels since the Great Depression, and the recession has done little
to reverse the trend, with the top 1 percent of earners taking 93
percent of the income gains in the first full year of the recovery.
The yawning gap between the haves and the have-nots -- and the
political questions that gap has raised about the problems of the
middle class -- has given rise to anti-Wall Street sentiment and
animated the U.S. presidential campaign. Now, a growing body of
economic research suggests that it might mean lower levels of
economic growth and slower job creation in the years ahead, as well.
"Growth becomes more fragile" in countries with high levels of
inequality like the United States, said Jonathan D. Ostry of the
International Monetary Fund, whose research suggests that the
widening disparity since the 1980s might shorten the nation's
economic expansions by as much as a third.
Reducing inequality and bolstering growth, in the long run, might
be "two sides of the same coin," research published last year by the
Since the 1980s, rich households in the United States have
earned a larger and larger share of overall income. The 1 percent
earns about one-sixth of all income and the top 10 percent about
half, according to statistics compiled by the respected economists
Emmanuel Saez of the University of California, Berkeley and Thomas
Piketty of the Paris School of Economics.
For years, economists have thought of such inequality in part as
a side effect of policies that fostered America's economic dynamism -
- its tax preferences for investment income, for instance. And
organizations like the World Bank and the I.M.F., which is based in
Washington, have generally not tackled inequality in the world head
But economists' thinking has changed sharply in recent years. The
Organization for Economic Cooperation and Development warned this
year about the "negative consequences" of the country's high levels
of pay inequality, and suggested an aggressive series of changes to
tax and spending programs to tackle it.
The I.M.F., too, has cautioned the United States. "Some dismiss
inequality and focus instead on overall growth -- arguing, in
effect, that a rising tide lifts all boats," a commentary by fund
economists said. "When a handful of yachts become ocean liners while
the rest remain lowly canoes, something is seriously amiss."
The concentration of income in the hands of the rich might not
just mean a more unequal society, economists believe. It might mean
less stable economic expansions and sluggish growth.
That is the conclusion drawn by two economists at the fund, Mr.
Ostry and Andrew G. Berg. They found that in rich countries and
poor, inequality strongly correlated with shorter spells of economic
expansion and thus less growth over time.
And inequality seems to have a stronger effect on growth than
several other factors, including foreign investment, trade openness,
exchange rate competitiveness and the strength of political
For developing economies, the channels through which inequality
might drag down growth seem clear. Inequality might foster political
instability and lead to violence and economic destruction, for
instance, a theme that fits for Arab Spring countries, like Egypt
and Syria. …