Saturday, May 5, 2012

Paul Krugman: Income Inequality is impeding Economic Recovery

The famous economist is confirming what Occupy Wall Street has been saying:

 Before the Great Recession, I would sometimes give lectures in which I would talk about rising inequality, making the point that the concentration of income at the top had reached levels not seen since 1929. Often, someone in the audience would ask whether this meant that another depression was imminent.

Well, whaddya know?

Did the rise of the 1 percent (or, better yet, the 0.01 percent) cause the Lesser Depression we're now living through? It probably contributed. But the more important point is that inequality is a major reason the economy is still so depressed and unemployment so high. For we have responded to the crisis with a mix of paralysis and confusion - both of which have a lot to do with the distorting effects of great wealth on our society.
But other learned individuals have made the same argument:
"Countries where income was more equally distributed tended to have longer growth spells," says economist Andrew Berg, whose study appears in the current issue of Finance & Development, the quarterly magazine of the International Monetary Fund. Comparing six major economic variables across the world's economies, Berg found that equality of incomes was the most important factor in preventing a major downturn.
But you don't have to be a scholar to figure this out. Less disposable income means less consumption thus a weaker economy:
But it should be obvious to anyone that if all of the income that results from increases in economic output flow to the top one percent of the population, then the rest of us won't have that income to buy the increasing number of products and services that result from the increased productivity.

What happens, then, is simple: economic growth stalls. Companies won't hire people to produce more products and services if no one has the money to buy them, so they lay people off. Taken as a whole, the economy then has even fewer people with the money to buy new goods and services.

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