Political strife and inequality go hand in hand. But the growing gulf between the very rich and the rest – which in the United States is approaching levels last seen in the 1920s – could also be a menace to economic growth and financial stability, recent International Monetary Fund research shows. If so, it’s not just the 99 per cent that have an interest in narrowing the wealth gap.
America’s rising inequality has so far been seen as largely a political menace, threatening a rise in populist politics, protests or social disorder. And some economists have viewed chunky differences in income as a spur to growth by giving the less well-off a greater incentive to work hard and take risks. The IMF research department has devoted intellectual firepower to examining the economic perils of yawning wealth gaps. Their finding is that the less equal a society becomes, the harder it is to sustain bursts of growth.
For a start, unequal societies are less flexible in dealing with economic setbacks. Resolving even minor fiscal problems, for example, gets harder amid simmering resentments between the rich and the rest. Unequal nations are more likely to squander human capital, running short of skilled labour faster when growth accelerates. In addition, glimpsing the lifestyles of top earners appears to encourage more modest earners to run up excessive debts. Recent research from the University of Chicago, hardly a hotbed of socialism, suggested that middle-class families were more likely to get into financial trouble when they lived close to the super-rich. Politicians in those areas were also more likely to promote policies that made credit easier to obtain.
On a global level, the IMF economists posit that if more polarized countries, such as those in Latin America, could halve the inequality gap with more egalitarian Asian tigers, then periods of economic expansion would last twice as long. Indeed, income gaps, the fund’s research suggests, may have a more powerful impact on growth than free trade, a competitive exchange rate or foreign investment.
For all its economic advantages, including flexibility, the United States can ill afford to become complacent. The financial instability and political paralysis of recent years hint that the world’s largest economy is already starting to succumb to some of the symptoms of inequality. This should worry the richest 1 per cent almost as much as the rest.