The Macro Effects of Income Inequality

This NYT article argues that income inequality, the impetus for Occupy Wall Street and a frequent topic of debate in today’s discourse, may harm more than just those at the bottom of the pay scale. Many economists now argue that increasing income inequality is also harmful for overall economic growth. Since the 1970s, inequality in the United States has continued to increase at an alarming rate. Until now, inequality has often been viewed as only dangerous for those in the lowest income groups; however, we are now seeing that inequality is detrimental to a country’s overall competitiveness.

Redistributive policies are the solution to reducing this harmful rise in inequality. But the question that divides liberals and conservatives is: how do these policies affect the economy as a whole? Stiglitz (quoted in this article) and other liberal economists agree with the overall argument that redistribution reduces inequality and produces a more prepared workforce and a society that is more conducive to economic growth. Conservatives, however, contend that redistribution slows growth by reducing incentives to build and invest in business.

My take on the issue is in line with Stiglitz’s. If, in the process of increasing a nation’s overall GDP, trade and economic policies concentrate income in the hands of a relatively small segment of the population (as we have found in the case), government should then redistribute a portion of these gains among the entirety of the population in order to both ensure equity in income distribution and produce an environment conducive to education, trust, and overall growth.