Why we need an economy that works for everyone — and how to get it
Last year, the U.S. Census Bureau announced that in 2018, income inequality rose to its highest level in more than 50 years, as the gap between the richest and the poorest households in the United States again widened. Even as we continue to see jobs added to the U.S. economy each month and unemployment at an historically low rate, much of the gains from economic growth are accruing to the top of the income ladder while low- and middle-class families are left behind.
Looking at the latest empirical evidence from economics and other social sciences, we can draw three conclusions about the ways that economic inequality constricts our economy. First, high economic inequality obstructs the supply of people and ideas into the economy by limiting educational opportunities, lowering physical and mental health outcomes, and restricting exposure to innovation starting in childhood for those not at the top. Studies show that the economic circumstances into which children are born affect their economic outcomes as adults by hindering their ability to climb the income and wealth ladder — even among people who show aptitude for a particular job or career path.
Second, inequality subverts our democracy and the institutions that manage the market. High economic concentration means that corporations and the ultra-wealthy are able to transform economic resources into vast political and social power, making our political system ineffective and our markets dysfunctional. Powerful corporations are able to muscle competitors out of business, suppress wages, and hobble innovation. High inequality — especially when characterized by high concentrations of income and wealth — makes our political system ineffective, as the wealthy dictate the terms and we fail to have the capacity to raise sufficient revenue or invest in public goods such as schools, transportation infrastructure, and healthcare.
And finally, inequality distorts our macroeconomy through its effects on both consumption and investment. Slow wage growth and meager workplace benefits rob families who are not at the top of the economic ladder of buying power, undermining one of the key drivers of economic growth — the stable incomes that drive consumer spending. A savings glut among the super-wealthy pushes capital toward rent-seeking and expanding the credit supply, rather than the productivity-enhancing investments we need. This has the potential to slow short- and long-term economic growth by decreasing productivity and innovation.
But it doesn’t have to be this way.
As president and CEO of the Washington Center for Equitable Growth, my goal is to develop the solutions that can reverse this trend and diminish inequality in our economy in order to increase the productivity and well-being of families all across the United States. We at Equitable Growth work to advance evidence-backed ideas and policies that promote strong, stable, and broad-based economic growth. We work with a growing network of scholars who are researching the best ideas out there to grow the economy equitably, in areas from progressive tax policy to enhanced family and economic security, and from a robust and representative labor movement to strong competitive markets.
These ideas are needed now more than ever. Economic inequality has been growing steadily since the 1980s, before which economic growth was shared more equally across the income ladder. A recent study shows that from 1980 to 2016, those in the top 1 percent saw their real incomes (after accounting for inflation) grow by more than 180 percent while those in the bottom 50 percent saw only a 25 percent increase. The distribution of wealth — the amount of accumulated assets, including money, property, and other kinds of capital — is even more unequal than the distribution of income. In 1978, those in the top 1 percent controlled 22 percent of all wealth in the U.S. economy. This 1 percent of families now controls more than 36 percent of all wealth, while the top 0.5 percent’s share of wealth is about the same as that of the bottom 90 percent.
As I lay out in my book Unbound: How Inequality Constricts Our Economy and What We Can Do About It, the research clearly demonstrates that inequality is preventing the economy from reaching its full potential and has become a barrier to economic progress. It is impossible for the market to benefit most families if too many are obstructed from finding their best fit or if the economic power of a small group at the top of the income and wealth ladders subverts the market itself and we have to cope with a distorted macroeconomy. Unless high economic inequality is constrained at the top and there are counterweights to concentrated economic — and social and political — power, inequality will continue to constrict our economy.
This conclusion comes from taking a long, hard look at the latest empirical evidence from economists and other scholars. What we see is that broader access to new data and methods that allow researchers greater confidence in the causal implications of their analyses is pushing the field toward new conclusions. In my book, I argue that we’re in the midst of a paradigm shift, with significant implications for how scholars think about the economy and the policy levers policymakers can choose from.
The good news is, equitable growth is achievable. The research and shifts in economic thinking point to the conclusion that we should focus on reducing the capacity of those with high concentrations of resources to subvert our markets and our democracy. Addressing the acceleration of economic concentration has the power to unleash innovation, spur productive investment, and lower prices for consumers. Similarly, creating a more progressive system of taxation and levying higher taxes on those at the very top would raise revenues, creating opportunities to make more comprehensive public investments, which are crucial to growing the economy and tackling inequality.
Addressing the subversions of high economic concentration will make it easier to make significant progress addressing the obstructions and distortions that high economic inequality creates. We could do things like raise the minimum wage, establish nationwide access to safe, affordable, and enriching childcare — creating good jobs for care workers in the process — and provide paid family and medical leave to all workers, which would improve health outcomes and increase the likelihood that an employee returns to work following a life event such as the birth of a child or a serious medical issue, lowering the impact of leave on employers and the economy more broadly.
We must also ensure that there are institutions capable of acting as a counterweight to concentrated economic power. Giving workers more bargaining power over wages and working conditions, for example, would grow the economy by increasing productivity and reducing the harmful effects of overwork. It would (re)create a counterweight to the social and political power created by our economy’s high concentration of economic wealth in the hands of the few.
These are just some of the solutions we at Equitable Growth are cultivating, analyzing, and advancing every day to tackle the major issues that are facing our economy and hampering widespread prosperity. I have spent my entire career building on these and other ideas to expand the economy and make it work for us all — not just those with financial and economic means — and I’m looking forward to sharing more about the work we’re doing to get there and the sea change in economic thinking. Be sure to keep up with the latest on Equitable Growth on our website, Twitter, and Facebook.
Boushey is president & CEO and co-founder of the Washington Center for Equitable Growth.