Morning Must Reads: Inequality Bad

The biggest challenge facing the next President of the United States is runaway inequality.

The State of Working America lays out the trends:

Between 1983 and 2010, nearly three-fourths (74.2 percent) of the total growth in household wealth accrued to the top 5 percent of households in the wealth distribution. For the bottom 60 percent of households, wealth declined from 1983 to 2010. The median household had 22.0 percent less wealth in 2010 than it did in 1983, with median household wealth dropping from $73,000 to $57,000 over those 27 years. In 2010, more than 1 in 5 households (22.5 percent) had either zero or negative wealth.

Annie Lowrey lays out an interesting but somewhat incomplete narrative on how we got to where we are and leaves us with a troubling question about what happens if inequality keeps rising. I say incomplete narrative because the falling minimum wage and falling union membership are two key components of rising inequality which she leaves out.

In the last few years, research by the Brookings Institution, the I.M.F. and dozens of economists at top research universities has started to coalesce into a compelling narrative.

Starting in the 1970s, earnings were squeezed for low- and middle-income households. They borrowed to improve their standards of living — buying bigger houses than they could afford and using those houses as piggy banks. Families bet that housing prices would keep rising, making a three-bedroom outside Phoenix a safe store of wealth. But the housing bubble collapsed, and took the rest of the economy with it.

Research by Raghuram Rajan of the University of Chicago has also underscored the importance of deregulation. “Starting in the early 1970s, advanced economies found it increasingly difficult to grow,” he wrote this year. “The shortsighted political response to the anxieties of those falling behind was to ease their access to credit. Faced with little regulatory restraint, banks overdosed on risky loans.”

Thus, inequality might help explain the recession and the sluggish recovery after it. But now, economists and policy experts are facing the thorny and politically freighted question of what the United States’ inequality might mean over the next several years.

Dylan Matthews at The Wonkblog reviews a new study by researchers with the Urban Institute on job polarization and the Great Recession (geeks will find the whole study here). The Urban Institute researchers find that the risk of unemployment for low-, middle- and high-wage workers increased as a result of the Great Recession. But in bad news for middle-class workers who lost a job during the recession, these workers experienced substantially less wage growth than other groups when compared to a period before the recession.

The Great Recession, according to a popular theory known as “job polarization,” has led to a loss of middle-income jobs and created a new reality in which the only jobs are either lucrative and highly skilled (computer programming, for instance) or else menial and poorly remunerated (e.g. janitorial work)...

Of course, one would expect that one’s risk of becoming unemployment would increase between 2004 and 2008, no matter where one falls on the income spectrum. But if job polarization is speeding up during the recovery, you’d expect that risk to shoot up more for middle-income people than for the poor of the affluent. But Mitchell and Nichols find that the risk of unemployment grew across the board, and not just for those in the middle:

That said, Mitchell and Nichols do find two areas for concern. While middle-income people were no likelier to lose their jobs, those that did become unemployed saw bigger pay cuts once they got another job than people at the top or bottom of the income scale:

 

Heather Boushey and Adam Hersh explore the relationship between the factors that are widely considered important in boosting economic growth and the strength of the middle class. Our challenge is figuring out which Presidential candidate will pursue policies that seek to grow the economy from the middle out.

What boosts productivity or creates incentives to invest?...

  • The level of human capital and whether talent is encouraged to boost the economy’s productivity
  • Cost of and access to financial capital, which allow firms and entrepreneurs to make real investments that create technological progress to use in the economy
  • Strong and stable demand, which creates the market for goods and services and allows investors to plan for the future
  • The quality of political and economic institutions, including the quality of corporate governance as well as political institutions and a legal structure that enforces contracts
  • Investment in public goods, education, health, and infrastructure, which lays the foundation for private-sector investment

Strong empirical evidence in economics and other social sciences suggests that the strength of the middle class and the level of income inequality have an important role to play for each of these five factors boosting productivity and spurring investment.

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