Economic Find: The Rich Make Us Poorer

In their March/April 2011 issue, Mother Jones published a series of charts on inequality that has swept the progressive blogosphere.  Mother Jones’s “charty goodness” illustrates in no uncertain terms how rich the superrich are exactly and which politicians reside in their pockets.

Economists have long debated the merits of inequality.  Many argue that increased inequality is good for society because it fosters entrepreneurship and creates investment dollars, leading to economic growth, which in turn will generate benefits for everyone.  You’ve heard this one before; it’s “trickle-down” economics.

Recent research, however, conducted by the Political Economy Research Institute and CPE staff economist Jeff Thompson finds that, regardless of economic growth levels and the fact that incomes for the top 10% have steadily risen since the late 1970s (see chart below), greater concentration of income in the hands of the wealthy actually causes middle and lower level incomes to fall.  In other words, the rich getting richer pushes the poor deeper into poverty and makes the middle class poorer as well.

What explains this disturbing phenomenon? Possible causes include the fact that the rich spend their money on luxury items that do little to boost overall demand or that affluent households invest in stocks, bonds, and privately-held corporations in far away states or countries, preventing their dollars from funneling into their local and state economies.

How do we offset this dynamic? That’s pretty clear.  Bring back progressive taxes. See the Economic Find: Are Americans Overtaxed? for more on America’s tax structure.

 

Inequality

 

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Created by Member Economist Sue Holmberg

October 2011

 

Source: Thompson, Jeff and Timothy M. Smeeding. (2011) “Searching for the Supposed Benefits of Higher Inequality: Impacts of Rising Top Shares on the Standard of Living of Low and Middle-Income Families.” Political Economy Research Institute. http://www.peri.umass.edu/236/hash/90a20b4828ff82068d7e2f28670b4b31/publication/460/