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Income Inequality, Growth Go Together

October 07, 2013

By Scott Winship

Focus on the wealth gap is misplaced. Narrowing it shouldn’t be a priority.

Inequality is once again heading skyward. The latest estimates from economists Thomas Piketty and Emmanuel Saez show that last year, the richest 1% of Americans took home 19% of all income received. After declining from 2007 to 2009, inequality is once again approaching the levels of the Roaring ’20s.

Meanwhile, middle-class incomes have fallen since 2007 by about 10%. Given these numbers and the sluggishness of the recovery, it is natural that Americans are anxious about inequality, but the focus is misplaced.

As I reviewed last spring in the journal National Affairs, the evidence on inequality’s effects offers little reason to blame rising income disparities for the ills facing our economy. When research finds a connection between economic growth rates and inequality levels, as often as not higher inequality tends to correspond to higher growth.

The size of the economic pie is not fixed; allowing innovators and entrepreneurs to become rich might produce more pie for everyone, even if the rich are receiving a larger share of it. Indeed, from 1979 to 2007 (comparing business cycle peaks), the non-partisan Congressional Budget Office indicates that middle-class incomes grew by 27% to 46%, depending on whether or not rising federal assistance and falling taxes are taken into account.

Incomes at the top have risen by a lot more, but top-performers’ pay has risen dramatically in business, banking and baseball. Often, it is claimed that CEOs are fleecing their shareholders, but executive pay in private companies has risen just as much. The best of the best are increasingly valuable across industries, and paid accordingly.

What’s more, inequality between the middle class and the poor was no higher on the eve of the Great Recession than it was in 1989. For all the claims of declining opportunity, most studies suggest that the economic mobility of today’s adults has been as substantial as in the previous generation.

Nor does research consistently show that economic inequality leads to political inequality, in part because the preferences of the rich, middle class and poor differ less than we often imagine.

New research might someday overturn the inconclusive body of evidence on inequality’s effects. But what we know today does not suggest that reducing inequality should be a priority.

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