Question

Does Income Inequality Impair the American Dream?

Answer 1

United States income inequality is slowing aggregate demand growth (spending by families, companies, and governments) by transferring an ever greater share of income to rich families that invest rather than spend. This rise in inequality has been driven overwhelmingly by the failure of typical American workers to keep pace with productivity growth across the economy. In recent years, rising inequality has reduced aggregate demand growth by 2-4 percentage points of GDP per annum.

In recent decades the American economy has been characterized by a stunningly large upward redistribution of income. The bottom 90 per cent of American households reported around 70 per cent of total U.S. economy revenue in 1979. This share had fallen to about 60 per cent by 2016.
By far the most important cause of this upward redistribution is the growing gap between economic-wide productivity growth (a measure of income produced in an average hour of work in the United States) and the hourly pay of typical American workers since the mid-1970s. Had these two measures developed in the same way they did in earlier eras, there would have been no possibility of redistribution of upward income.

The increase in inequality has significantly contributed to the downward pressure on growth in demand, which is labeled secular stagnation. Inequality has moved wealth to higher-income households with higher savings rates from low and middle-income households with relatively low savings rates. All the rest equal, this transition drags on growth in demand as consumption rises more slowly. This transfer is likely to slow growth in aggregate demand every year from today, by an estimated 2 to 4 percentage points of gross domestic product (GDP).

For decades income inequality has been increasing. The top 1 percent wages have grown by 154 percent in the last 30 years, while the bottom 90 percent have grown by only 17 percent. As the economic ladder's rungs move further and further apart, conventional wisdom says climbing them will become a lot harder. When the deck is stacked against the middle class and the poor, prospects for economic mobility — the American dream — will vanish. But others see inequality as a positive sign, a sign of a dynamic and prosperous economy which ultimately benefits everyone. Yet, contrary to popular sentiment, over the last few decades, mobility has remained constant.