Category: Economic Stability

John Podesta: Income inequality’s ripple effect

Posted on by Heather Boushey

John D. Podesta, discussing the launch of the Washington Center for Equitable Growth and whether and how economic inequality and economic growth are linked.)

Last week, Barack Obama, delivering the clearest and most powerful economic policy speech of his presidency at an event sponsored by the Center for American Progress, identified “the combined trends of increased inequality and decreasing mobility” as “the defining challenge of our time.” The week before, in his first papal exhortation, Pope Francis robustly criticized “trickle-down theories” of economic growth as having “never been confirmed by the facts” and as leaving behind the poor and vulnerable. Soon after being awarded the Nobel Prize in Economics, Robert Shiller told the Associated Press that inequality was “the most important problem that we are facing now today.”

This article originally appeared in Politico Magazine on December 9, 2013.

These concerns are serious. For the last three decades, the U.S. economy has been growing dramatically more unequal and less mobile by nearly every measure. The fact is that we don’t know nearly enough about what high inequality means for economic growth and stability. We need a better understanding of how inequality affects demand for goods and services and macroeconomic and financial imbalances. We are in the dark on whether and how inequality affects entrepreneurship, or whether it alters the effectiveness of our economic and political institutions, or how it affects individuals’ ability to access education and productively employ their skills and talents.

That’s why we’ve established the new Washington Center for Equitable Growth, a long-term effort to support serious, sustained inquiry into structural challenges facing our economy. Our aim is to enable rigorous research on the relationship between inequality and growth through a competitive, peer-reviewed, academic grant program; to elevate the work of young scholars and new voices; and to help make sure cutting-edge research is relevant and informative to policymaking debates.

The basic facts bear repeating. Income inequality in the United States today has reached levels last seen during the Roaring ’20s. Over the last three decades, the top 1 percent of incomes have risen by 279 percent, while the bottom fifth of workers have seen an increase of less than 20 percent. In 1979, the middle 60 percent of households took home 50 percent of U.S. income. By 2007, their share was just 43 percent.

These trends have continued since the end of the Great Recession. Ninety-five percent of income gains since 2009 have gone to the top 1 percent of earners. In 2012, the top 10 percent took home more than 50 percent of the nation’s income—a record high. After a brief period in the late 1990s during which incomes rose across the board, median wages stagnated during the 2000s, and have remained depressed during the economic recovery.

These trends are aided and abetted by a dominant narrative defining how the economy grows. According to conventional wisdom, inequality may upset or offend us, but it’s a necessary part of a competitive economy. Economic growth is driven by the wealthy few, who make investments, build businesses, and create jobs—ideally, according to some, in an atmosphere of small government, low taxes and limited regulation. Policy interventions to reduce inequality or support lower and middle-class Americans are assumed to hurt job creation or harm growth.

“Over the years, as I’ve looked for the evidence behind this story, I’ve found it to be flimsy,” Nobel Prize laureate Robert Solow says in a video that premiered last month at WCEG’s launch. “Sometimes there’s not much evidence there at all.”

This tough-love, winner-take-all narrative dominating policymaking is far too limited a way to think about how a complex, modern, diverse economy like ours expands and thrives. The strongest periods of economic growth in the 20th century were also times when incomes rose across the board.

With the guidance of distinguished academic economists and thinkers from around the country, WCEG will start by asking questions about the relationship between inequality and economic growth—questions for which we don’t purport to have the answers.

But we know asking the questions is important, because inequality matters to Americans. About half of public school students in the South and West today live near, at or below the poverty line. At the same time, the educational achievement gap between low- and high-income students has increased by about 40 percent since the 1960s, even as the black-white achievement gap has shrunk.

And while life expectancy has continued to increase, albeit at different rates, for most demographic groups, it has declined by 5 years for white women who do not have their high-school diploma. It’s an unprecedented drop for a prosperous, modern, industrialized economy, and researchers can only speculate on why it is happening.

We need to understand what the impact of these and other trends will be on our economy in the long term, and how policymakers should respond now. Over the course of the 20th century, many countries produced great wealth, but no combination of economic and political systems has resulted in shared prosperity or economic dynamism to rival the United States. As we move forward into the 21st century, understanding how to sustain that prosperity and dynamism is in the interest of us all. A clearer understanding of how today’s levels of inequality affect growth and stability—and how to best promote a more equitable economy—is a critical place to start.

John Podesta’s Remarks at the Launch of Equitable Growth

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John Podesta delivered opening remarks at the launch event for the Washington Center for Equitable Growth on November 15, 2013.

Good morning. Thank you all for joining us as we launch the Washington Center for Equitable Growth. And thank you, Heather, for your kind words and your hard work to make Equitable Growth a reality.

We would not be here today if not for the efforts of many passionate, intelligent people. Before I begin, a few thank-yous are in order:

The members of our steering committee for their time and energy; led by our intellectual godfather and inspiration for this project, Bob Solow;

The talented academics and researchers who have joined our Research Advisory Board, whose help and expertise we will call on often in the months and years to come;

And, of course, all of our distinguished panelists, some of whom have traveled a long way to be with us today. Thank you for being here.

I also want to make a special thank you to my friend Herb Sandler and the foundation he and his late wife, the wonderful Marion, founded, for their leadership and support.

I also want to acknowledge and thank Neera Tanden, the President of the Center for American Progress, for supporting and housing Equitable Growth at the Center for American Progress and for sustaining an environment of open inquiry and a constant search for deeper understanding about how our economy works.

It’s wonderful to be in this historic synagogue, this beautiful old building which has been a cornerstone of the District of Columbia’s civic and community life for more than a hundred years.

I trust it won’t come as a shock to anyone in this room when I say we live in a country where incomes have been increasingly unequal since 1979. Today, our income distribution more closely resembles that of El Salvador than Canada.

Over the last three decades, the top 1 percent of earners have seen their incomes increase by 279 percent. But the incomes of the bottom fifth of workers have risen by less than 20 percent.

Since the end of the Great Recession, the top of 1 percent of earners have captured 95 percent of income gains. Last year, the top 10 percent of earners took home more than half of the country’s total income.

Income inequality in the United States today has reached levels not seen since the Roaring ’20s.

These trends aren’t abstractions. They have real and serious consequences for the American people. The unemployment rate at the bottom of the income scale is above 20 percent, while unemployment among the richest Americans stands at just 3.2 percent. That’s not abstract. Last year, one in five children under 18 lived in poverty, the highest rate since the early 90s. All the gains we made in the fight against poverty during the Clinton administration have been washed away. That’s not abstract.

The conventional wisdom says that inequality, even dramatic inequality like we have today, is an inevitable byproduct of a competitive market economy.  For many years, certainly among conservatives but also among some progressives, the notion that policy interventions that dampen inequality would also hurt growth has not been adequately challenged.

For some, these assumptions go further: that the ingenuity of the American people can flourish only in an atmosphere of small government, limited regulation, and low taxes on the rich. Growth comes from high-income investors, the so-called “job creators.” Inequality may be unfortunate—it may insult our sense of fairness—but tolerating it is necessary if we want strong economic growth. Or so we often hear. Despite the lack of evidence that it’s true.

We think that is far too narrow a way to understand how an economy like ours actually grows and thrives. Today, the U.S. has rates of inequality comparable to developing countries, despite having a far more complex economy—but we’re largely in the dark about the implications of that fact.

Recent research in the international context suggests that more equal societies generally experience longer periods of economic growth. Other studies point to the importance of issues ranging from investing in human capital to encouraging political inclusion as ways to support long-term economic growth and stability.

But evidence remains thin on how worsening inequality affects these economic components: how it may alter demand for goods and services, or hinder entrepreneurialism, or undermine our political or economic systems.

We are launching the Washington Center for Equitable Growth to help accelerate new, cutting-edge research into how these deep structural changes affect growth and stability. We want to facilitate a deeper dive, through a competitive, peer-reviewed grant program, into understanding the mechanisms through which inequality affects growth. We want to help make important new research on economic growth and stability relevant to policymaking. We want to help support and elevate excellent work from talented younger scholars, a number of whom are joining us here this morning. And we want to shift the debate away from polemics and back towards a substantive, evidence-backed conversation here in Washington.

Ten years ago, I worked with Neera, Sarah Wartell, and a small group of people to start the Center for American Progress. We wanted to build an institution where progressive leaders could hone their policy ideas and collaborate across a range of critical issues, from national security to clean energy to education. I’m tremendously proud of what we have achieved, and I know CAP will continue to be a leader in Washington for decades to come.

But I’ve always thought that academic research is an underutilized resource in the policy debate. Too often, rigorous research and analysis, even when it concerns our most critical social and economic issues, doesn’t make its way from the academy to the shores of the Potomac, where policymaking by anecdote or instinct too often takes precedence. But when academic economists tell us that they don’t have clear evidence yet, it’s hard for policymakers to know the best road forward. Even where we do have answers, it can be difficult for academic research to have an impact on the policy debate given the separation between these two communities.

So we’re fortunate to be guided by a truly outstanding group of academics with interest or expertise in policy. Throughout our planning, we’ve engaged with three generations of leading economic thinkers: one represented by Bob Solow; the second by Laura Tyson and Alan Blinder; and the third by Raj Chetty, Emmanuel Saez, Melody Barnes, and Brad DeLong.

Today, we’ll hear from some of these leading scholars, who are really well-positioned to dive into the questions, and from some of those policymakers, who are demanding a more rigorous evidence-based point of departure for the policy battles that lie ahead.  What you will hear today are the kinds of interesting and insightful conversations on which we believe the debate on inequality and growth must be based.

Now, it gives me great pleasure to introduce a true lion of the economics profession, Professor Robert Solow, who I know wishes he could be here with us in person today, but who’s such an inspiration to this effort we went to him to get his thoughts on the matter.

It would be hard to say that better or more succinctly. Today would not be possible without the support and expertise of dozens of passionate, dedicated people. There are representatives from many organizations and foundations here today who have been leaders in supporting important research and casting a critical eye on unanswered economic questions.

One of those people is Rob Johnson, the president of the Institute for New Economic Thinking. We’re thrilled to have Rob here with us today to say a few words. Under Rob’s extraordinary leadership, INET has sponsored some truly cutting-edge, exciting research on the economic challenges of the future. We’re looking forward to a long and fruitful partnership with Rob and with INET.

Please join me in welcoming Rob Johnson.