Soaring income inequality may be holding the United States back from a broader economic recovery, according to a newly released study by the International Monetary Fund. Although political scientists have long debated whether social justice comes at the expense of social product—theoretically by reducing incentives to work and invest—the report provides strong evidence that an unequal distribution of wealth actually causes economies to experience deeper recessions and weaker recoveries. “Sustainable economic reform,” the authors warn, “is possible only when its benefits are widely shared.”
The report's authors studied a wide range of international data spanning nearly sixty years, and found that there was a positive correlation between the equality of a society and the strength and duration of its economic growth during expansionary periods. Based on their model, a 10 percent decrease in income inequality could actually extend U.S. economic growth by a full 50 percent. Higher levels of income equality were also found to correspond more strongly to sustained economic growth than any other factor, including trade openness, political institutions, and lower debt levels.
Perhaps most importantly, the study found that “igniting growth is much less difficult than sustaining it.” Sustained economic growth, the authors suggest, requires the participation and involvement of an entire economy—not just its most affluent members. When there is high income inequality, the risk of future financial crises and political instability increases substantially, undermining economic confidence. Moreover, a highly unequal distribution of wealth “may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis.”
Although incomes for the top 1 percent are growing faster than ever, this data suggests that no broad economic recovery will be possible if the wages of the bottom 90 percent of Americans continue to stagnate or decline. For a time, this lopsidedness was obscured by the mountain of household debt ordinary Americans took on to maintain their customary high levels of consumption. Now, with the collapse of the housing bubble, the illusion of easy credit is behind us. Without a truly revived middle class—once the core of U.S. economic strength—it seems less and less likely that we will experience more than anemic growth.