John Podesta: Income inequality’s ripple effect

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.