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Economist Robert Gordon recently wrote a paper in which he asked the provocative question, “Is U.S. economic growth over?” And he identifies income inequality as one of “headwinds” facing the economy:The most important quantitatively in holding down the growth of our future income is rising inequality.
The growth in median real income has been substantially slower than all of these growth rates of average per-capita income discussed thus far.
The Berkeley web site of Emmanuel Saez provides the startling figures. From 1993 to 2008, the average growth in real household income was 1.3 per cent per year.
But for the bottom 99% growth was only 0.75, a gap of 0.55 per cent per year. The top one per cent of the income distribution captured fully 52% of the income gains during that 15-year period.
If what we care about when we talk about “consumer well being” is the bottom 99 per cent, then we must deduct 0.55 per cent from the average growth rates of real GDP per capita presented here and elsewhere.
Wait, I thought the paper was about slowing innovation, not wealth redistribution. Moreover, is there really much evidence that income inequality hurts economic growth in advanced economies? Scott Winship has his doubts, finding “scant evidence” that it’s indeed the case in advanced economies:
There are plenty of reasons to worry about inequality of opportunity — socioeconomic gaps in college-going are on the rise, and test-score gaps between rich and poor kids have similarly increased, to name just two examples. But the evidence that these problems would diminish if we could limit the top 1 per cent’s incomes to those seen in other countries is nonexistent. (Incidentally, the incomes of the top 1 per cent have been on the rise in our peer nations too, and middle-class income growth has slowed in those countries as well.)
Studies on whether inequality hurts economic growth typically focus on developing countries, and research by, for instance, Christopher Jencks suggests that inequality across rich countries does not go hand in hand with lower growth. The latest research on whether inequality leads to financial crises concludes that it does not — rising inequality tends to co-occur with expansions in credit, but it is the latter that appears to lead to crises.
Similarly, the influential research of economists Daron Acemoglu and James Robinson argues that inequality leads to less democracy and reinforces itself through politics, but it too is based on developing countries. There has been hardly any research that rigorously tests whether economic inequality in the United States is associated with worse political or policy outcomes for the nonrich. In fact, policy preferences do not line up very neatly with the purported “class interests” of voters. The United States is simply not a banana republic.
Oh, and here is the gist of that Jencks study Winship refers to, a study that shows inequality is actually associated with higher economic growth:
Pooling data for 1905 to 2000, we find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed for between 22 and 85 years. After 1960, however, a one percentage point rise in the top decile’s income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year. This relationship is not driven by changes in either educational attainment or top tax rates.
If the increase in inequality is permanent, the increase in growth appears to be permanent. However, our estimates imply that it would take 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of total income.
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