Ever-Growing Income Inequality Is Bad For Economic Recovery

Author: February 16, 2013 9:25 pm
Income inequality; David G. Klein @ The New York Times

Income inequality; David G. Klein @ The New York Times

The stock market seems to be booming, meaning corporate profits must be up, so companies must be making money again. Yet the 99%, the bracket into which almost every American falls when it comes to income, saw virtually none of that growth go into their pockets. In fact, from 2009-2010, nearly all of the recovery seen in the economy was eaten up by the 1%. The rest of us actually saw our incomes fall slightly in 2010, according to an article published in The New Republic.

 In 2009-2010, 93% of all pre-tax income gains went to the top 1% of income earners. From 2009-2011, they captured 121% of all pre-tax income gains, and while the rest of the 99% saw a decline in pre-tax income of, on average, 0.4% (hence the over 100% mark for the top 1%), these people saw their incomes shoot up by an average over 11%.


The fact of the matter is that growing income inequality, such as what’s been seen over the last three years during the so-called “recovery,” is bad for overall economic growth, and makes recoveries from recessions like ours a lot more fragile. Economists believe that the sluggish growth that we’ve seen could be a result of ever-growing income inequality here. It can also cause economic expansion that is unstable, unpredictable, and shorter in duration.

The United States is a consumer economy, meaning that consumers are the ultimate drivers of the economy. This is part of why growing income inequality is such a problem; it’s also why asking the poor and middle class to shoulder the bulk of the nation’s tax burden is a problem. According to the Wall Street Journal’s blog, the expiration of the payroll tax holiday pulled $9 billion out of the economy by sending that money to the government, and caused consumers to cut back on their spending. Retail growth was only 0.1% in January, compared to the 0.7% seen in November and December.

Right-wing economists talk about business investment as the primary driver of the economy. These investments include production, investments in technology, machinery, other equipment, and more. They more or less assert that a company’s supply chain, along with B2B sales, are the primary drivers of economic growth.

To be sure, business investment is part of a true economic recovery, but it’s not the only one. Consumer demand has to play major part, because there has to be an end-user for products and services somewhere in the equation. Supply-side economics contends that when businesses invest more, particularly in capital goods, they spur each other’s growth, leading them to hire more people, which in turn spurs economic demand, meaning more productivity all up and down the supply chain, and more hiring, more money in the hands of workers, etc. Hence, why corporate taxes need to stay low, why labor laws need to be relaxed, why unions need to go. This is supply-side, or trickle-down, economics in a nutshell.

But when the biggest segment of an economy can’t afford to spend regardless of employment status, and restricts their spending to necessities and paying down debt, demand falls off and stays that way. Demand-side economics contends that the consumers need more money in their hands to spend, so that companies’ demand increases, requiring them to hire more people. It supports far more stringent labor protections, including mandating higher wages, so that the lower segments of the economy can prosper.

There simply aren’t enough people in the 1% to spur the demand that’s needed, and we’ve spent 30 years watching the trickle-down theory fail miserably. If the income of the 99% continues to decline, or even just stagnates, while the income of the top 1% continues to grow, the economy will never truly recover.

Rika Christensen is an experienced writer and loves debating politics. Engage with her and see more of her work by following her on Facebook and Twitter.

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