…tomorrow to give a talk at Washington U, at the invitation of the great poverty warrior Michael Sherraden.
Here’s the introduction to the paper (haven’t written the rest yet) and here’s the PowerPoint deck which takes you through the whole thing. Check it out and see what you think. Note that the very last bullet of the very last slide (before appendix) ends with a question.
In this paper I present a simple model linking economic growth to poverty reduction, opportunity, and mobility. I then inject inequality into that chain and hypothesize about its impact. Inequality diverts growth from middle and low-income families, and under certain conditions—ones I show are present in the US economy over the past few decades—leads to higher poverty rates than would otherwise prevail and middle-class income stagnation. These developments lead, in turn, to less opportunity for certain groups, and that leads to diminished mobility.
There is, in the model, another dimension to inequality’s impact. By dint of concentrating income at the top of scale, in a system like ours where money can buy power and influence politics and policy, inequality becomes self-perpetuating. This part of the model predicts that policies to help promote greater equity will be blocked and those that exacerbate inequality, like “trickle-down” tax policies or favorable tax treatment of capital incomes, will find considerable support from the political class.
The model generates numerous hypotheses. For example, the model predicts that increased inequality has been a causal factor behind middle class income stagnation and “sticky” poverty rates (i.e., poverty rates that are less elastic to growth). It predicts that inequality would be causally linked to worse educational outcomes, which would in turn hurt the upward mobility of children in lower income families. It predicts that political influence makes the system less responsive to those in, for example, the bottom half of the income scale, and that the system of taxes and government transfers would become less effective over time in reducing inequality.
Analytically, it is hard to make these linkages in a causal sense. The processes behind the links in the model are complicated and any regression analysis, for example, would almost certainly omit key variables. For example, I cite research that shows that the gap in spending on “child-enrichment” goods, like books, quality child-care, private schooling, between low and high income families has jumped by a factor of three since the 1970s, which is also the period when inequality began to grow. The model would predict this outcome, and would further predict that it dampens economic mobility of those affected by it. But I cannot prove that this development is a causal function of inequality (or, for that matter, that in earlier years, when inequality is much lower, this gap did not grow).
Similarly, I have convincing evidence that the tax system and safety has, in fact, grown less inequality reducing over time, and some of that is clearly a result of policy, such as regressive tax changes and less counter-cyclical welfare programs (part of it is demographic, as the aging population shifts social expenditures to less redistributive programs). But while I associate these developments with the dynamics of the model, my evidence is largely circumstantial. Future work needs to build tests for causal linkages between higher inequality and the outcomes I show throughout.
The paper proceeds with the evidence of all the links in the chain, including the rise of income inequality, diminished opportunity and mobility, and evidence of the impact of inequality on political power and policy outcomes. I then go through a set of predictions as to what type of policies we might expect to see if, in fact, such a model were operative—e.g., regressive tax changes, a transfer system less effective at pushing back against inequality, pro-austerity measures, and many other policy ideas that are clearly part of our current reality (and some that aren’t, like a smaller share of government outlays as a share of GDP). I conclude with thoughts about how politics and policy must change if we are to pushback on these harmful developments.