The large increase in inequality in recent years has been well documented by Thomas Piketty and Emmanuel Saez, among others. But less is known about the consequences. What impact has rising inequality had on the overall economy and on individual households?
Evidence is mounting that inequality is harmful to economic growth, and recent findings also suggest that increasing inequality "is linked to more deaths among African Americans."
Until recently, economists believed that inequality was good for economic growth. As Brian Keely of the Organization for Economic Co-operation and Development (OECD) explains, three reasons account for this. First, it creates an incentive for people to work hard and get ahead of others. Second, it provides those at the top with the wealth needed for innovative entrepreneurial activity. And third, the prevailing wisdom was that attempts to reduce inequality through tax and transfer schemes would inevitably lead to resources being "lost in the 'leaky bucket' of bureaucracy and administration."
However, the new research from the OECD that Keely describes, which was led by Michael Förster and Federico Cingano, shows that developing countries lost as much as 10% of GDP in the two decades prior to the Great Recession, and inequality affected growth in developed countries such as the U.S. and U.K. as well. In fact, the research found that growth was affected "even in countries with relatively low levels of inequality like Sweden, Finland and Norway."
Why does this happen? According to Keely, "Where overall inequality is higher in a society, a clear pattern emerges: People from such backgrounds invest much less in developing their human capital -- essentially their education and skills. By contrast, it has almost no impact on the educational investment of middle-income and wealthy families. The implications for social mobility are clear -- an ever-widening education and earnings gap between society's haves and have-nots."
So it's society's most vulnerable members who feel the largest impacts.
And according to research led by Amani Nuru-Jeter of UC Berkeley's School of Public Health, that's not the only way in which inequality affects the most vulnerable among us. This research looked at health outcomes and found that greater income inequality is associated with more deaths among African Americans, but fewer deaths for whites.
The research doesn't identify an exact reason why this happens, but it does appear that racial segregation is an important part of the story. According to Nuru Jeter, "This tells us that racial segregation has a significant impact on both income inequality and health inequality among blacks, but not among whites."
Given the increasing evidence of harmful effects of rising inequality, the question is what can be done about it? One answer comes from the OECD report.
Contrary to prevailing wisdom among economists, it says, "Tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented. In particular, redistribution efforts should focus on families with children and youth, as this is where key decisions on human capital investment are made and should promote skills development and learning across people's lives."