U.S. economic inequality continues to widen

  • Article by: ROBERT REICH , Tribune Media Services
  • Updated: April 23, 2013 - 1:05 PM

When all of the economic gains go to the top, the rest of the population doesn’t have enough purchasing power to keep the economy going.


This artwork by M. Ryder relates to the economy.

Photo: M. Ryder, Tribune Media Services

CameraStar Tribune photo galleries

Cameraview larger

Four years into a so-called recovery and we’re still below recession levels in every important respect except the stock market.

A measly 88,000 jobs were created in March, and total employment remains some 3 million below its pre-recession level. Labor-force participation is at its lowest level since 1979.

The recovery isn’t just losing steam. It never had much steam to begin with.

That’s because so much of our debate over economic policy has been beside the point.

On the one side have been Keynesians — followers of the great British economist John Maynard Keynes — who want more government spending and lower interest rates in order to fuel demand.

We tried a big Keynesian stimulus from 2009 to 2011, and the Federal Reserve is still keeping interest rates near zero.

I side with the Keynesians. But let’s be candid: Keynesians don’t have a clear answer for how much additional government spending is necessary in an economy, like ours, in which wages keep dropping. Simply urging “more” isn’t convincing.

On the other side are supply-side “austerics” who want lower taxes on the wealthy and on corporations to boost incentives to hire and invest, and who see government deficits crowding out private investment.

They’ve won the latest round by making the Bush tax cuts permanent for 98 percent of taxpayers, hiking Social Security taxes back up, and implementing the so-called “sequester” cuts in the face of stubbornly high unemployment.

But supply-side austerity doesn’t work. George W. Bush tried supply-side tax cuts for the wealthy in 2001 and 2003, and nothing trickled down. In fact, job growth slowed and real wages declined.

Austerity economics, meanwhile, has proven a disaster in Europe. Slashing public budgets when unemployment is high and demand already weak has been shown to be a recipe for recession — making public debt even larger relative to the size of the overall economy.

Both sides of the modern debate have neglected the economic elephant in the room: the scourge of widening inequality.

When all of the economic gains go to the top, the rest of the population doesn’t have enough purchasing power to keep the economy going. We should have learned this after 1928, when the top 1 percent got more than 23 percent of total income. The following year, the economy collapsed. The next time the top 1 percent got more than 23 percent of total income was 2007.

Businesses won’t hire and expand unless they have more customers. But most Americans can’t spend more, and net exports can’t possibly make up the difference. That’s why retail sales were down 0.4 percent in March and consumer sentiment has fallen to its lowest level in nine months.

The vast middle class is running out of money because real annual median household income keeps falling. It’s down to $45,018, from $51,144 in 2010.

All the gains from the recovery continue to go to the top.

The Obama administration is urging banks to lend more. But with declining incomes, the middle class can’t borrow more — and shouldn’t, given what happened after the last borrowing binge.

So one important way to get the nation back on track to is to restore middle-class prosperity and reverse the trend toward widening inequality.

  • get related content delivered to your inbox

  • manage my email subscriptions


  • about opinion

  • The Opinion section is produced by the Editorial Department to foster discussion about key issues. The Editorial Board represents the institutional voice of the Star Tribune and operates independently of the newsroom.

  • Submit a letter or commentary
Connect with twitterConnect with facebookConnect with Google+Connect with PinterestConnect with PinterestConnect with RssfeedConnect with email newsletters