Does Income Inequality Retard Economic Growth?

This article was written by a labor market economist.  He argues that income inequality has reduced consumer demand for goods and services.  That, in turn, has reduced the demand for business investment.  Consequently, the economic stagnation that has been underway for almost a decade is best explained as a shortfall in aggregate demand. We can't have a full employment economy under conditions of growing inequality.

Some liberal economists agree that we are suffering from a shortfall in aggregate demand.  They also believe that monetary policy has been ineffective as a stimulus because interest rates are at the zero lower bound.  They argue that fiscal stimulus is necessary but that governments have imposed fiscal austerity which has contributed to economic stagnation. Most of them do not believe that income inequality is responsible for economic stagnation.

Conservative economists also reject any relationship between economic stagnation and income inequality.  They believe that the labor market is efficient and that labor market participants are rewarded or punished in relation to their contribution to output.  They tend to reject the use of monetary policy or fiscal policy.  Government intervention will only distort the efficient operation of the idealized competitive market that they worship.

One of the conclusions from this analysis is that soft core and hard core neoliberal models of the economy have shifted western economies away from the goal of a full employment economy.  Stagnant growth in wages and consumer demand are the outcome of the move toward an economy that is driven by growth in corporate profits.  The financial industry plays a more important role in this economy that it has in the past.  So has a poorly managed globalization of the economy and the necessary liberalization of capital movement.

The article concludes with a presentation of an economic model based upon full employment and a well managed form of globalization.  This model is based upon a rejection of the key assumptions that underlie soft core and hard core neoliberal ideology which continue to dominate our conception of the macro and micro economy.  Understanding the role of these assumptions is probably more important than other contributions in this article.  They continue to shape our view of the economic world in which we live.