Narrow the Income Gap to Lift the Economy

August 31, 2011By Juan Carlos Ordóñez

Business is booming . . . for those catering to the rich. The New York Times recently reported that luxury retailers are seeing $9,000 tweed coats and $1,400 shoes fly off the shelves.

But far from taking flight, the nation’s economic recovery may have stalled. And it never got off the ground for much of Main Street.

As concern lingers over the possibility of a double-dip recession, lawmakers in both Oregon and the nation’s capital would be wise to listen to the growing chorus of economists and business people now drawing a link between income inequality and economic weakness.

Rarely has the gap between the rich and the rest stretched so wide. Over the last few decades most Oregonians experienced stagnant or declining wages, while the richest Oregonians saw their income swell. By 2007, on the eve of the Great Recession, the wealthiest 1 percent of Oregonians together collected nearly as much income as all of the lowest earning 60 percent of workers. Though the disparity may have narrowed a bit following the stock market crash of 2008-09, the income gap remains extreme.

As income inequality climbed to historic levels just prior to the recession, the nation’s economy plodded along as if some of its engines had shut down. The roughly seven-year economic expansion that ended in late 2007 was the weakest expansion since 1949, in terms of GDP, investment and employment growth.

History warns of the danger of such levels of inequality. The last time that income inequality reached such levels was just prior to the Great Depression. Marriner Eccles, a businessman who became Federal Reserve Chairman in the depths of that collapse, later observed:

[B]y taking purchasing power out of the hands of mass consumers, the [wealthy] denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could only stay in the game by borrowing. When the credit ran out, the game stopped.

A similar theme once again can be heard in the halls of the Federal Reserve. In June, Federal Reserve Governor Sarah Bloom Raskin stated that “inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently.”

More recently, a corporate-funded study published by the Conference Board of Canada —a country with less income inequality than the U.S. — stressed the risk that high income inequality can diminish economic growth.

Reducing income inequality, at both the state and national level, can begin by heeding billionaire Warren Buffet’s recent call to end tax breaks enjoyed by the rich and to impose higher marginal tax rates on millionaires. Other key steps include removing the barriers to organizing by unions, which play an essential role in fostering a strong middle class; investing more in the public structures — education, for example — that create economic opportunity; and repairing the nation’s tattered safety net.

Bringing about a more equitable society is a win-win proposition. It promises to lift our beleaguered middle class and the economy.