Wealth divide might stifle jobs

“This inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently,” she told a forum sponsored by the liberal New America Foundation. “All of these forces drag down maximum economic growth.”

Some experts wonder if the trend is irreversible, but few question whether inequality has increased.

Government data — from Census Bureau to the IRS — show a much higher concentration of both income and wealth at the upper echelons. And the higher you go, the greater the concentration.

The 400 wealthiest American households, for example, have more net worth than the bottom 150 million combined. The top 0.01 percent of Americans make 6 percent of total income — more than five times the share they had three decades ago.

Meanwhile, median household incomes, adjusted for inflation, have barely budged since the mid-1970s. Government figures released last week showed median paychecks in 2010 dropped again, falling to their lowest inflation-adjusted level since 1999.

Something called the Gini Index, which economists use to measure inequality, has risen 16 percent nationally since 1979 and 11 percent in Georgia.

Some economists argue that growing inequality has slowed job growth coming out of the past three recessions. It used to be — since the depths of the Great Depression — that the economy would come sprinting out of recessions with a burst of hiring.

But the recovery of 1991-92 was weak, the bounce-back after the 2001 recession was weaker and both of them look like booms compared to what has followed the vicious drop of 2008-09.

If inequality truly is the prime culprit, how does it dampen economic growth?

When money is spread among many households living paycheck-to-paycheck, some economists say, that money is likely to get spent. If that money goes to a rich family instead, yes, there will be purchases — often big-ticket items. But much of the money will go to investments and savings.

So the result of the income shift would be less demand in the daily economy.

“Certainly the rich do save more than poor people,” said economist Mark Thoma of the University of Oregon. “And in good times that is not necessarily a bad thing because the savings find their way into investments, which go to things that lead to better growth in the future. But right now it just sits in a bank.”

But there are other explanations for meager job growth than income inequality — many of them entwined.

Among them: globalization, technology advances, fluctuations in productivity, the rise of “knowledge” workers and the decline of manufacturing, the shift away from savings and ballooning consumer debt.

And there are demographics.

The huge Baby Boomer bulge has distorted many measures, including inequality, argued William W. Beach, director of the conservative Heritage Foundation’s Center for Data Analysis. “Now they are about to go in reverse. They will begin to fall in incomes as they retire.”

Moreover, the inequality data does not yet fully reflect the effects of the 2008-09 recession because it doesn’t show how much income rich people lost, Beach said.

“If you could see the Gini Index now, I would predict that it would show inequality significantly reduced,” Beach said.

And not only conservatives say it’s wrong to blame inequality for weak growth.

For example, Jared Bernstein, a senior fellow at the liberal Center on Budget and Policy Priorities, said rising inequality doesn’t always match with weak growth.

“Compare the 1990s where inequality was increasing pretty steeply, but there was pretty strong growth,” he said. “You can have growing inequality and still have growing middle-class income.”

Moreover, don’t underestimate the spending muscle of the wealthy, he said. “These folks have pretty healthy consumption appetites.”

Former Clinton administration economist Robert J. Shapiro, now chairman of Sonecon, an economic advisory firm, argued that the clear problem in consumer spending was the burst of the real estate bubble.

“Think of what happened to housing values,” he said. “People have gotten poorer — that is what has happened to consumption.”

But some economists say that inequality helped drive the economy into the financial crisis in the first place.

When people at the top of the income ladder are making more, they look for new ways to reap returns on their money, said Robert Frank, author of “The Darwin Economy” and a Cornell University economist. “In response to their demands, the financial industry creates new instruments for extending credit to the middle class.”

A debt bubble can grow for a long time before it bursts. And while it expands, it reshapes the economy — even though some changes are nearly invisible. After all, consumers who borrow can keep spending.

But those changes may help explain weak and erratic growth, said economist Steven Fazzari of Washington University.

Before the early 1970s, productivity and wages rose together — the more the economy produced, the more efficient it was, the better paid were ordinary working people. But bit by bit, wages fell behind, Fazzari said.

“People were not earning enough to buy what they produced,” he said. “When that happens, we have to find a way to patch the hole. And there are a bunch of ways. I think that the big thing is that the middle class started borrowing so their spending could keep growing. ... It became a kind of ticking time bomb.”

Eventually, the bomb exploded.

Economists used to think that efforts to make incomes more equal had to make the economy less efficient. But now, they are not so sure.

A study by two economists with the International Monetary Fund compared data from 15 nations from 1950 to 2006 and found that when inequality rose, it undermined growth.

“A rising tide lifts all boats and our analysis indicates that helping raise the smallest boats may help keep the tide rising for all craft, big and small,” wrote Andrew Berg and Jonathan D. Ostry. “Reduced inequality and sustained growth may be two sides of the same coin.”

Still, most countries in the study were less developed than the United States. And by itself inequality may not hamstring growth — even if it’s growing.

Perhaps inequality matters less once the economy is chugging along. It may be that after recession, when a turnaround depends on consumer spending, a lack of middle-class buying power is most sorely missed.

Which is why inequality might matter now.

Massive government spending seems blocked by both politics and deficit worries. The global economy is worrisome. And with consumers still trying to pay off debts, more borrowing is not a good idea, said economist Fazzari of Washington University.

What the economy needs, it is not likely to get, he said. “Wage growth would be best.”