While it's theoretically possible to imagine an economy which experiences both extreme inequality and healthy GDP growth, it's not possible to imagine this economy growing that way.
'Jobs Or Inequality?' That's No Choice At All
Credit: Flickr
January 3, 2014

What's the economic issue we should focus on - jobs, or inequality? An increasing number of people, including the President and New York's new mayor, have suggested that inequality of wealth and opportunity is the defining issue of our time.

But some of the folks at the Washington Post's "WonkBlog" are having none of it. First, editor Ezra Klein declared that unemployment, not inequality, should be the left's defining issue. That drew responses from the likes of Paul Krugman and Jared Bernstein (and yours truly, here).

Bright Future
Then Dylan Matthews, a staff reporter on the team (and creator of the highly addictive "Knowmore" site) used a hypothetical scenario to challenge the importance of inequality. Matthews took to a platform called "TwitLonger" (which, parenthetically, looks a lot like something we used to call a "blog") to argue that people who consider inequality our society's defining issue "really think the gap between the rich and poor, separate from the actual positions of the rich and poor on their own, is the problem."

Matthews imagines a future America where poverty, hunger, and homelessness are eliminated; unemployment's below 4 percent; and GDP and median wages keep growing. If you think inequality's the problem, says Matthews, you won't be satisfied.

"If that sounds preposterous," writes Matthews, "then maybe it's because you don't actually think inequality is our biggest problem. You think something like poverty or joblessness or median wage stagnation is. And you're right."

False Choice
But that's a false choice. It won't be possible to achieve anything close to that scenario without addressing today's sky-high inequality. And while it's theoretically possible to imagine an economy which experiences both extreme inequality and healthy GDP growth, it's not possible to imagine this economy growing that way.Here's why: Unemployment, under-employment, and long-term wage stagnation are suppressing consumer demand. That demand is the engine of a growing and healthy economy - one which is not overly dependent on "rentier" income (see Bob Kuttner here for more on rentiers), bubbles, or cost-inflated financial transactions for its growth, as ours currently is.

Higher tax rates for the wealthy and corporations - that is, returning them to something approaching historical levels - provides much of the revenue for programs which fight poverty and enhance social mobility, as well as for those which lead to job creation and wage growth. It's not an "either/or" between reducing inequality and increasing employment or reducing poverty; it's "and/and."

Seeds of Chaos
Klein argues otherwise on job creation, writing that "We've had nearly full employment during periods of high inequality (say, 2005) and we've had high unemployment during periods of relative equality (say, 1982)."

But other recessionary forces were at work in 1982. Employment levels were good in 2005, thanks to a series of bubbles (the housing bubble was inflating rapidly that year). But job creation was relatively weak during that decade, even before the crisis of 2008.

What's more, that decade, like the one which preceded it, was laying the groundwork for today's ongoing crisis with massive financialization of the economy, which included mass speculation and fraud; growing wage stagnation for the middle class; and increasing loss of social mobility. Celebrating 2005 employment statistics is like celebrating the pre-iceberg Titanic for its nautical safety.

Not Inequality Only
That's not to say that the Klein/Matthews argument is entirely without merit. We shouldn't focus exclusively on inequality, especially if we haven't reached consensus on its origins or its relationship to today's other economic problems. But there appears to be plenty of consensus about these things in the Bernstein/Krugman crowd, to which I subscribe, and I'd paraphrase that consensus view as follows:

Inequality is the result of economic forces such as increased financial speculation, financialization of economic profits, deregulation, trade policy, tax breaks, and other government policies which favor the wealthy and corporate interests. These forces have also led to today's high levels of unemployment and poverty.

What's more, these are not forces of nature. They're the products of government policy. Matthews makes an important point about that in a post entitled "The government is the only reason US inequality is so high." He points out that our "tax and transfer" policies are the main reason we score significantly lower than some European democracies, including Sweden, on the equality scale.

And, lest we forget: those government policies are the product of a money-driven electoral system.

False Future
The scenario of a prosperous but highly unequal future which Matthews later paints is, I would argue, a fundamentally improbable one. We've critiqued the right/libertarian dystopias of Tyler Cowen and Tom Friedman in the past, but those scenarios (created by Cowen and adopted by Friedman) are much more plausible than Matthews'. Cowen's clear on this point: there will be a small minority of very successful and prosperous individuals, surrounded by an impoverished "shanty town" majority.

While that future is anything but inevitable (although Cowen argues that it's exactly that), at least it has internal coherence. Matthews' does not. A consumer-driven economy - one in which people buy things -leads to high employment and robust wages. But the high-earning individuals in our society aren't making their profits from consumer goods. That's one of the main reasons they're doing so well: No employees and low overhead, at least in the US, means higher profits ...

Present Tense...
in the short term. But that kind of growth can't go on forever. And as the "rentiers" come up against the limits of growth, the temptation to cheat becomes irresistible. In other words, inequality is an unstable system subject to perpetual job-losing shocks and "corrections," along with wage-suppressing employment uncertainty.

Which, in turn, produces more inequality ...But why are we arguing about hypothetical futures and ignoring the very real present? We're still in a situation where the "multiplier effect" - the amount of growth which can be achieved through government spending - is very high. The situation cries out for higher taxation on the wealthy and corporations, coupled with investment in jobs and growth. In other words, it calls out for the very same policies which would reduce inequality.

In the end it's one challenge, not two or three.

To Hate Inequality is Human
It may be true that people sometimes argue against inequality without considering the larger economic implications. That's only human - literally, as it turns out. Studies have shown that human beings are intrinsically "hard-wired" to dislike inequality. So, yes - people would still be dissatisfied in Matthews' hypothetical, unequal Utopia.

For that matter, I would be dissatisfied with a society in which middle-class and lower-middle-class earners have no chance to better themselves. In my opinion, the opportunity for self-improvement is a fundamental human right.

What's more, it's not just those individuals who lose out. When social mobility is denied to any group, society loses a vast talent pool filled with people who could make things better for everyone.

One Challenge
And an unequal nation's politics - even a hypothetical, prosperously unequal one - will inevitably be dominated by the wealthy few and their preferred policies of deregulation, under-spending, and lack of government investment. That would inevitably lead to future crises like those we face today.

So let's stop arguing about which issue to focus upon. It's the same fundamental challenge, no matter how you look at it, so why not work on fixing it instead?

Can you help us out?

For nearly 20 years we have been exposing Washington lies and untangling media deceit, but now Facebook is drowning us in an ocean of right wing lies. Please give a one-time or recurring donation, or buy a year's subscription for an ad-free experience. Thank you.


We welcome relevant, respectful comments. Any comments that are sexist or in any other way deemed hateful by our staff will be deleted and constitute grounds for a ban from posting on the site. Please refer to our Terms of Service for information on our posting policy.