Building a strong foundation for the U.S. economy

The U.S. economy experienced several structural shifts over the past several decades, including a large increase in inequality across a variety of dimensions. Despite headlines about inequality as a single issue, there are several aspects to the phenomenon. To be sure, incomes are skyrocketing among the top earners, income growth for the middle class is slower than in the past, and income growth is all but stagnant for those at the bottom.

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Yet income isn’t the only dimension of inequality. We have seen increases in inequality in wages and salaries, access to quality jobs, educational attainment, family and household workplace policies, and, of course, wealth. Considered together, the top members of our society are quickly pulling away from the rest of us across a variety of dimensions, with those in the middle and the bottom of our society experiencing little to no gains.

We are not the only ones to notice these trends. Nor are we the only ones to be asking what this means for our society and for our economy. Last year, just after we launched the Washington Center for Equitable Growth, President Obama argued that inequality was “the defining challenge of our times.” Soon after, Sen. Marco Rubio (R-FL) and Rep. Raul Ryan (R-WI) called on policymakers to grapple with specific aspects of inequality and what it means for our nation.

A robust set of academic research seeks to understand how the changes in income inequality affect our economy. Looking at the overall picture, this research suggests that in cases of extreme inequality, such as prior to the Great Depression in the 1920s as well as today in the United States, inequality is negatively associated with economic growth and stability. But this research on the overall relationship between inequality and growth does not necessarily help us understand why or how inequality affects the economy or provide policymakers with solutions to address these challenges.

Then, last spring, Paris School of Economics professor Thomas Piketty spurred an international debate with his book, “Capital in the 21st Century.”4 He sought to understand the interrelations between rising inequality and economic growth. The publication of his book led to many an econo-geek sporting t-shirts with the now-famous, but still cryptic “r>g” equation. One of Piketty’s fundamental conclusions is that so long as the rate of return on capital continues to be greater than the rate of economic growth—or, wage growth—then capital will become ever more concentrated.

There are for a variety of reasons to think that this calcification of wealth is not in the interest of long-term economic growth, which brings us to a set of empirical questions that Equitable Growth seeks to understand:

• What are the mechanisms through which inequality affects the economy?
• Which ones play out in the short term and which play out in the long term?
• Are they mostly on the supply side or on the demand side, or both?

We have prepared this report for our second annual conference on September 19, 2014, and have asked a diverse array of scholars and policymakers with expertise in issues such as human capital development, productivity growth, entrepreneurship, and wage growth to examine these developments across our economy. Because the trends—and their implications—play out differently across the income spectrum, we have organized our discussion around trends and policies focused on the bottom, the middle, and the very top of the income ladder.

We seek to begin a conversation that not only accelerates analysis on whether and how these factors affect economic growth and stability but also inspires policy solutions that reduce inequality and expand economic growth, mobility and opportunity for all.

—Heather Boushey, executive director and chief economist, Washington Center for Equitable Growth