How Inequality Hurts the Economy

Recommended Reading: Bloomberg Businessweek's "How Inequality Hurts the Economy" by David J. Lynch. People have been making this argument for a while now -- inequality hurts growth because channeling wealth to the few simultaneously concentrates risk -- but Lynch's piece overwhelms because it lays out the full range of harms done to the economy by inequality.  

For starters, there is the link between economic growth and education. According to World Bank economist Branko Milanovic, "Widespread education has become the secret to growth. [But] broadly accessible education is difficult to achieve unless a society has a relatively even income distribution."

Inequality's affect on education is especially marked in the United States where, unlike most other industrialized countries, property taxes fund our public schools. But beyond the shopworn arguments about equality in funding, there are also matching concerns about the real income of parents. Families without access to affordable childcare tend to have to work less, thus depriving their households of much needed income. And families who subsist on paltry wages often work too many hours to tend to their children's educational needs. According to national averages, one-third of children come to kindergarten without the necessary linguistic skills to begin learning to read. Conservatives tie this trend to parental neglect, but could it be that the economy -- and thus we as a society -- is actually failing these children?

Inequality also blunts economic expansions, according to IMF economists Andrew Berg and Jonathan Ostry, who show that countries with more equal distributions of income tend to be more capable of sustained growth.

Lynch adds that the growing economic, educational, and social divide will inevitably make political consensus more difficult to achieve. Summarizing the observations of University of Chicago economist Raghuram Rajan, Lynch explains that unequal societies that experience economic shocks make a habit of concentrating blame as much as they do wealth. These deleterious effects extend beyond Washington right back to Wall Street. The fundamental lack of faith in politics harms investment because not only do old investors fear the volatility, but also new investors view the market as a place where a privileged few rig the game. This happened after the Great Depression. Millions of investors avoided the market, which meant that the Dow Jones didn’t reach its September 1929 high until 1954, twenty-five years.

This is what inequality has done to our society: created a bifurcated educational system, blunted incomes and the potential for growth, and created a kind of mistrust that is warranted but unproductive. The problem is how do we move past this awful state when its burdens remain unevenly distributed? The 1 percent or 5 percent, or however you want to describe them, can afford to live in this new rapacious economic and social reality. The rest of the society cannot.

Lynch has no answer to this question and I'm afraid neither does Washington or Wall Street.