Last year, two economists at the International Monetary Fund, Andrew Berg and Jonathan Ostry, published a paper showing that countries that experienced longer periods of strong economic growth were significantly more likely to be characterized by more equality than less. Inequality, they speculated, might amplify the risk of financial crises, which are often followed by long periods of slow or negative growth. It might bring about political instability, which can discourage investment. Inequality might make it harder for ordinary citizens to invest in entrepreneurial activity, or even invest in their own training and education.
If that story sounds a bit familiar, it should.
It is hardly coincidence that the past 20 years — a period in which inequality has risen noticeably in the United States and around the world — has also been characterized by repeated and severe financial crises. There was the junk bond sell-off of 1987, the continuing savings-and-loan crisis of the early ’90s, the Asian financial crisis and the tech-and-telecom bust of the late ’90s, and the near meltdown of financial markets in 2008.
Surely one explanation for the most recent crisis is that too many households took on too much debt as they struggled to maintain their standard of living in the face of nearly three decades of stagnant wages and salaries. Another might be that with so much of the nation’s wealth accumulating in so few hands, it was inevitable that they would misallocate much of it by bidding up the price of “positional” goods such as houses in the Hamptons and seats at the best private schools.
It is worthy of note that this period of rising inequality also coincided with a dramatic slowdown in college graduation rates, particularly among men. More recently, it has also coincided in a decline in business startups and other measures of entrepreneurial activity.
And can anyone doubt the connection between rising inequality and the increasingly partisan and divisive nature of American politics, which has made it difficult, if not impossible, for government to respond quickly and intelligently to the major economic challenges facing the nation? Surely that can’t be good for growth.
Judge: Mr. Hutz we've been in here for four hours. Do you have any evidence at all?Lionel Hutz: Well, Your Honor. We've plenty of hearsay and conjecture. Those are kinds of evidence.
Yet again, let us consider what would happen if the rich had half their wealth confiscated and destroyed. Would Republicans and Democrats suddenly come to terms on contentious economic policy such as taxes and entitlements? Would the philosophical divide suddenly be bridged if hedge fund managers were consigned to the middle class? Would political rhetoric sudden take a softer, less contentious tone if Hollywood multi-millionaires saw their earnings plummet? What is the connection here?