"Income inequality’s sick joke: A rising tide only lifts luxury yachts"

[applegrove]

Income inequality’s sick joke: A rising tide only lifts luxury yachts

by Sean McElwee at Salon

http://www.salon.com/2014/10/04/income_inequalitys_sick_joke_a_rising_tide_only_lifts_luxury_yachts/

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For a long time, the right has argued that we shouldn’t worry about inequality because the true concern is the reduction of poverty. Conservatives also maintained that higher levels of inequality were unimportant because “a rising tide would lift all boats,” and high levels of inequality propelled the economy forward. New research by Branko Milanovic and Roy van der Weide decimates these myths. Milanovic and van der Weide find that inequality doesn’t fuel growth for the whole economy, but rather, just the rich.

Before we get to the research of Milanovic and van der Weide, it’s important to understand how mainstream thought on inequality and growth has changed recently. For a long time, mainstream economists didn’t spend much time worrying about distribution. Nobel laureate Robert Lucas declared, “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”

Once rampant inequality did become an increasingly mainstream concern, Martin Feldstein insisted that the question is “not inequality but poverty.” Economists believed that redistribution slowed down economic growth, and that attempts to reduce inequality would, as a result, only worsen poverty. The reasoning had at least two strands of thought: First, since the poor tend to consume most of their income, it was good for the rich to have more wealth to invest in the future — inequality would increase savings. Second, inequality provided incentives for individuals to work harder to take home more of the pie.

There is now a burgeoning literature showing that these assumptions aren’t true, and that inequality actually reduces growth. That’s because the reasons for accepting inequality were actually backward. Instead of motivating the rich to invest, higher inequality meant that the poor took on more and more debt, destabilizing the economy. Without enough poor and middle-class families consuming their products, businesses had fewer customers, and less revenue. Further, instead of providing the poor and middle class an incentive to better their lives, higher inequality gave the rich a reason to pull up the ladder, leaving the poor behind. Instead of working harder, the rich sit back on their wealth. The poor and middle class, disenchanted by lack of opportunity, have less money to invest in their own education (and are therefore are increasingly burdened by debt). Inequality thereby reduces growth by reducing both demand and upward mobility.




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