Paul Lachine

Is Inequality Inhibiting Growth?

As a reformed Europe starts growing, parts of it might experience US-style inequality. But Europe would be far worse off if it were to avoid serious reform and lapse, Japan-like, into egalitarian and genteel decline.

CHICAGO – To understand how to achieve a sustained recovery from the Great Recession, we need to understand its causes. And identifying causes means starting with the evidence.

Two facts stand out. First, overall demand for goods and services is much weaker, both in Europe and the United States, than it was in the go-go years before the recession. Second, most of the economic gains in the US in recent years have gone to the rich, while the middle class has fallen behind in relative terms. In Europe, concerns about domestic income inequality, though more muted, are compounded by angst about inequality between countries, as Germany roars ahead while the southern periphery stalls.

Persuasive explanations of the crisis point to linkages between today’s tepid demand and rising income inequality. Progressive economists argue that the weakening of unions in the US, together with tax policies favoring the rich, slowed middle-class income growth, while traditional transfer programs were cut back. With incomes stagnant, households were encouraged to borrow, especially against home equity, to maintain consumption.

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