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Increase demand to decrease inequality

BY DANIEL TAIBLESON | APRIL 16, 2012 6:30 AM

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For decades, the spoils of economic growth in the United States have been disproportionately enjoyed by the wealthiest among us — in 2010, 93 percent of income gains were experienced by the top 1 percent.

This has starved the U.S. consumer base (the middle and working classes) of duly earned wage increases — average wages have only increased by 11 percent in the past 30 years, crippling consumer demand and making high unemployment nearly impossible to shake.

The United States desperately needs to decrease inequality and to increase demand. The only way to do that is for the legislators from Des Moines to D.C. to start prioritizing investments in human and material capital over preserving imprudent tax cuts that provide little measurable societal or economic benefits.

Economies struggle as income inequality rises according to a 2011 report published by the International Monetary Fund. While this is valuable information, because the report provided little explanation as to why income inequality cripples economies, it has proven difficult to formulate policy prescriptions.

Luckily, a recent paper co-written by economists Orazio Attanasio and Luigi Pistaferri has shed light on what might well be the causal link between income inequality and weak economic growth.

This scholarly duo constructed a picture of the relative changes in consumption among different income groups over the past 30 years. They then compared it with previously collected data on changes in income inequality. What they found was that as income inequality increases, consumption inequality increases as well — as income inequality increases, working- and middle-class consumption becomes depressed.

"Overall, our results suggest that there has been a substantial rise in consumption and leisure inequality within the U.S. during the last 30 years," said the report. "The rise in income inequality translated to an increase in actual well-being inequality during this time period because consumption inequality also increased."

This is extremely valuable information, because we know that the stubbornly high unemployment rate the United States has experienced since the collapse of the financial and housing sectors in 2007 and 2008 has been the consequence of lagging consumer demand.

While liberal economists have argued it relentlessly, conservative economist have conceded it reluctantly, but many polls of business owners in recent years have demonstrated it unequivocally.

And it makes perfect sense. Why would a business owner hire additional employees to produce additional goods if it is highly unlikely that those additional goods will be bought?

They would not, and they have not. It should then come as no surprise that states in the United States with low levels of inequality have fared far better than their highly unequal counterparts.

For example, Iowa had the sixth-lowest level of inequality in the United States according to the recent census data. This is in large part why Iowa has dramatically lower unemployment (5.3 percent) than the national average (8.3 percent), even though median income in Iowa is not dramatically different from the national average.

Iowa has a strong consumer base because the benefits of growth have been experienced more broadly, and this has helped to see the state through tough economic times.

Since the 1979, the wages of the top 1 percent earners have increased 11.25 times faster than those in the middle and 17.6 times faster than those at the bottom. This unequal distribution of economic gains has undermined the stability of the American economy.

As income inequality grows, middle- and working-class Americans consume less. When there is no demand, employers have no incentive to hire new employees. There are no more excuses for inaction. We know what the problem is — now, let's fix it.


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