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How Inequality Reduces Growth

There are numerous theories for why the US economy has continued to benefit the few at the expense of the many, and because these explanations are not mutually exclusive, it helps to consider them all. Fortunately, a new book by a leading light of macroeconomics does precisely that.

CAMBRIDGE – As the neoliberal epoch draws to a close, two statistical facts stand out. There has been a continuing increase in income and wealth inequality since 1980, especially in the United States; and there has been a marked slowdown in productivity growth across the developed world since 2000.

The first observation has motivated extensive academic work, with national income accounting being expanded to include explicit measures of the distribution of income. The fruits of these efforts are beginning to emerge in the economics literature.

The second observation has been studied by numerous scholars offering a range of explanations, not all of which are mutually exclusive. Some point to the problem of mismeasurement: owing to the widespread adoption of digital technology, the boundary of what national income accounts measure has shifted to exclude work previously captured by GDP. Others emphasize the slow pace of diffusion of the new technologies, which allows the “best” to pull far ahead of the “rest,” who are hampered by the incumbents’ power to limit access to innovation.

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