The yawning gap between the haves and the have-nots — and the political questions that gap has raised about the plight of the middle class — has given rise to anti-Wall Street sentiment and animated the 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
Reducing inequality and bolstering growth, in the long run, might be “two sides of the same coin,” research published last year by the I.M.F. concluded.
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
For years, economists have thought of such inequality in part as a side effect of policies that fostered the country’s economic dynamism — its
But economists’ thinking has changed sharply in recent years. The
The I.M.F. has cautioned the United States, too. “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
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 institutions.
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
For the United States, such channels are now the subject of intense research interest, with economists examining whether and how the gap between the rich and the poor fueled the recession and what it might mean.
In the last few years, research by the
Starting in the 1970s, earnings were squeezed for low- and middle-income households. They borrowed to improve their standards of living — buying bigger houses than they could afford and using those houses as piggy banks. Families bet that housing prices would keep rising, making a three-bedroom outside
Research by Raghuram Rajan of the
Thus, inequality might help explain the recession and the sluggish recovery after it. But now, economists and policy experts are facing the thorny and politically freighted question of what the United States’ inequality might mean over the next several years.
The recession seems to have cemented the country’s income and wealth inequality, not reversed it. The top 10 percent earn a larger share of overall income than they have since the 1930s. The earnings of the top 1 percent took a knock during the recession, but have bounced back. In contrast, the average working family’s income has continued to decline through the anemic recovery.
The distribution of wealth has become more concentrated as well. The lower income a family earns, the more wealth they tend to hold in their housing. Housing values have plummeted, and are not expected to recover for years if not decades. At the same time, many bond prices have soared and stock prices have performed well, aiding the upper-income households that tend to hold investments.
A new study by the left-of-center
Policy experts and politicians across the political spectrum — including
“What worries me is the idea that we’re in a vicious cycle,” said
Rea S. Hederman, an economist at the right-of-center