A recent report said that income inequality in the United States has increased dramatically since the market crash of 2008. While the wealthy lost the most in the crash, since then they have gained the most. From 2009 to 2012 the income of the “one percent” grew by 31%, while the income of the rest of us only grew by 0.4%.n Now the wealth gap in the nation is the greatest it has been in one hundred years.
LA Times Story: Income Gap Between Rich and Poor is Biggest in a Century.
I know that many conservatives believe that income inequality is benign, and merely a part of the economic environment. But the reality is that there are a number of problems associated with growing income inequality.
First, many economists note that when too large a share of a nation’s wealth goes to the wealthy it tends to reduce economic activity. That’s because the wealthy don’t spend the same share of their income as the poor and middle class. The poor spend virtually all of their income, which means that the money is recycled back into the economy. The middle class spend most of their income, and are able to squirrel away a bit. But the rich spend only a small percentage of their income, the rest goes into savings. The result is that when the rich have a bigger share of the nation’s wealth, there is less overall economic activity. We have certainly seen this over the last few decades, as the rich have grown richer the economy has slowed.
Second, income inequality often leads to political instability. People cast about for solutions to their economic woes, and look to political solutions to help deal with economic problems. But often different political parties have vastly different explanations for what happened, and hence vastly different solutions to the problems. And as economic problems persists, politics becomes more divisive and unstable. We have certainly seen this over the last few decades. Control of Congress changes hands every few election cycles, and we had massive “wave” elections in 1994 and 2006, where the incumbent party was washed out in a wave of voter disenchantment. In my opinion both the Tea Party phenomena of 2010, and the Occupy Wall Street protests a year later, are a product of our increasingly unstable politics.
Third, income inequality typically leads to social instability. Poverty and homelessness rise, drug use increases, out of wedlock births increase, and often crime rises as well. We have certainly seen a vast increase in poverty, homelessness, and out of wedlock births, but fortunately have not seen much rise in drug use or crime.
Throughout history, vast disparities between rich and poor can destabilize a nation. We are a long way from that, but the turmoil in our politics indicates that the problem is far from benign. And each day, as the disparity between the rich and poor grows, brings these problems ever closer.
See also: A Brief History of Economic Insecurity