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Mainstream Economists Finally Admit That Runaway Inequality Is Hurting The Economy

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Barry Ritzholtz 22/12/13

'

AP reported Tuesday:

The growing gap between the richest Americans and everyone else isn’t bad just for individuals.
It’s hurting the U.S. economy.
***
“What you want is a broader spending base,” says Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”
***
“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.
***
Economists appear to be increasingly concerned about the effects of inequality on growth. Brown, the Raymond James economist, says that marks a
shift from a few years ago, when many analysts were divided over whether pay inequality was worsening
.
Now, he says, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”

As one example, Paul Krugman used to doubt that inequality harmed the economy. As the Washington Post’s Ezra Klein wrote in 2010:

Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.

Krugman writes this week in the New York Times:

The discussion has shifted enough to produce a backlash from pundits arguing that inequality isn’t that big a deal.
They’re wrong.
The best argument for putting inequality on the back burner is the depressed state of the economy. Isn’t it
to restore economic growth than to worry about how the gains from growth are distributed?
Well, no. First of all, even if you look only at the direct impact of rising inequality on middle-class Americans, it is indeed a very big deal. Beyond that,
inequality probably played an important role in creating our economic mess, and has played a crucial role in our failure to clean it up
.
Start with the numbers.
On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie. Which mattered more? The answer, amazingly, is that they’re more or less comparable — that is, inequality is rising so fast that over the past six years it has been as big a drag on ordinary American incomes as poor economic performance, even though those years include the worst economic slump since the 1930s.
And if you take a longer perspective, rising inequality becomes by far the most important single factor behind lagging middle-class incomes.
Beyond that, when you try to understand both the Great Recession and the not-so-great recovery that followed, the economic and above all political impacts of inequality loom large.
***
Inequality is linked to both the economic crisis and the weakness of the recovery that followed.

Indeed – as we noted in September – a who’s-who of prominent economists in government and academia have now said that runaway inequality harms economic growth, including:

  • Former U.S. Secretary of Labor and UC Berkeley professor Robert Reich
  • Global economy and development division director at Brookings and former economy minister for Turkey, Kemal Dervi
  • Societe Generale investment strategist and former economist for the Bank of England, Albert Edwards
  • Deputy Division Chief of the Modeling Unit in the Research Department of the IMF, Michael Kumhof
  • Former executive director of the Joint Economic Committee of Congress, senior policy analyst in the White House Office of Policy Development, and deputy assistant secretary for economic policy at the Treasury Department, Bruce Bartlett

Even the father of free market economics – Adam Smith – didn’t believe that inequality should be a taboo subject.

Numerous investors and entrepreneurs agree that runaway inequality hurts the economy, including:

  • Billionaire
  • Billionaire

Indeed, extreme inequality helped cause the Great Depression, the current financial crisis … and the fall of the Roman Empire . And inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America. (More stunning facts.)

Bad government policy – which favors the fatcats at the expense of the average American – is largely responsible for our runaway inequality.

And yet the powers-that-be in Washington and Wall Street are accelerating the redistribution of wealth from the lower, middle and more modest members of the upper classes to the super-elite.'

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How about a warning in the subject line that you're referring to a US-centric piece? This is one subject where the US is so very different to us as to render their debate irrelevant here.

I doubt many (any?) of the individuals you list would argue for insane UK-style statism as a cure. Though many of both us and them might be happy to see something based on Beveridge's vision.

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How many will admit that this growing divide is because of the death of the middle-class, and that's happening here too (although many try to simply redefine the term).

Politicians and intellectuals only champion the poor and the rich, its become unfashionable to support the people who actually suport both these groups through their labour and their taxation.

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How many will admit that this growing divide is because of the death of the middle-class, and that's happening here too (although many try to simply redefine the term).

Politicians and intellectuals only champion the poor and the rich, its become unfashionable to support the people who actually suport both these groups through their labour and their taxation.

You used the phrase

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Inequality is only a problem because it reduces growth?

What!?

So, as long as the aggregate economy is growing then everything's fine, even if the majority get slowly poorer?

Its fine because "the state" is getting larger and that is all that matters to these sociopaths.

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How many will admit that this growing divide is because of the death of the middle-class, and that's happening here too (although many try to simply redefine the term).

Politicians and intellectuals only champion the poor and the rich, its become unfashionable to support the people who actually suport both these groups through their labour and their taxation.

Yes, I know lots of 20 and 30 somethings. Skilled working/lower-middle to middle-middle class. Most with degrees and education. They are all about Freecycle/eBay/Gumtree and have little money left after basics due to brutal living costs.

Henry Ford knew you needed well paid employees in order to have a market for the emerging consumer goods. You don't need to be a an economist see see that more more in the pockets of normal people will promote all manner of economic activity.

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Inequality is only a problem because it reduces growth?

What!?

So, as long as the aggregate economy is growing then everything's fine, even if the majority get slowly poorer?

Look at a bit of history. Those people are now so poor they almost all have things like fridges and washing machines (not to mention hot water on tap), that were luxuries of the rich back when boomers were young. Not to mention abundant food and energy, all so cheap it's now a scandal if today's poor can't heat their homes warmer than the Queen herself would've done when she was half her present age.

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When the not so wealthy slow down on spending, it affects the wealthy, only more people can fill that gap......the poor they spoil it for the rich.

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Yes, I know lots of 20 and 30 somethings. Skilled working/lower-middle to middle-middle class. Most with degrees and education. They are all about Freecycle/eBay/Gumtree and have little money left after basics due to brutal living costs.

Henry Ford knew you needed well paid employees in order to have a market for the emerging consumer goods. You don't need to be a an economist see see that more more in the pockets of normal people will promote all manner of economic activity.

And it's Chinese cheap labour that's acted like a sticking plaster on our living standards. A vast pool of labour was waiting to be exploited and these are the fruits of that particular capital sojourn. It's not that capitalism is wrong, it's that there's too much power in too few hands.

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Look at a bit of history. Those people are now so poor they almost all have things like fridges and washing machines (not to mention hot water on tap), that were luxuries of the rich back when boomers were young. Not to mention abundant food and energy, all so cheap it's now a scandal if today's poor can't heat their homes warmer than the Queen herself would've done when she was half her present age.

Ahhh yes..... did you know that the poor in the 1500's had a much much higher quality of life than cave men?

Thus the uk poor should be happy to live10 to a room and wear sack cloth's as they did in the 1500's. They are just greedy selfish so-and-so's wanting a higher quality of life than that.

....stupid "you've never had it so good!!" arguments get stupid replies......

Edited by alexw

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Look at a bit of history. Those people are now so poor they almost all have things like fridges and washing machines (not to mention hot water on tap), that were luxuries of the rich back when boomers were young. Not to mention abundant food and energy, all so cheap it's now a scandal if today's poor can't heat their homes warmer than the Queen herself would've done when she was half her present age

True but not really the point- the deflation in manufactured goods prices purchased with borrowed money does not address the reality that for many people the cost's of food, energy and housing are rising faster than their wages- add to that huge debt servicing costs and it's hard to see how the 'consumer society' continues without an ever increasing borrowing on the part of those consumers.

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Look at a bit of history. Those people are now so poor they almost all have things like fridges and washing machines (not to mention hot water on tap), that were luxuries of the rich back when boomers were young. Not to mention abundant food and energy, all so cheap it's now a scandal if today's poor can't heat their homes warmer than the Queen herself would've done when she was half her present age.

'Let them eat iPods'

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30 years of greed and "I'm all right Jack" libertarinism have done lasting damage in America.

Quite a lot of people over there seem to be calling for an ever harder lurch to the libertarian right to fix things. Like pouring more acid on a chemical burn whilst shouting "This is all socialisms fault!" that.

Edited by byron78

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30 years of greed and "I'm all right Jack" libertarinism have done lasting damage in America.

Quite a lot of people over there seem to be calling for an ever harder lurch to the libertarian right to fix things. Like pouring more acid on a chemical burn whilst shouting "This is all socialisms fault!" that.

40% of GDP going to the state, bank bailouts and Government Motors is libertarianism now is it?

I think the last time they had what is now libertarianism in the US would be some time before Woodrow Wilson...

Edited by EUBanana

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