On January 12 the Center for American Progress hosted an event with Alan Krueger, chairman of the President’s Council of Economic Advisers. Krueger discussed how inequality threatens both the middle class and the economy at large, and what needs to be done about it.
In her introductory remarks, CAP President Neera Tanden said, “I know that many Americans sometimes feel that [the] very notion of a strong and vibrant middle class is under attack. And obviously, we are going through a period of economic change and dislocation that has made people very wary of the economic challenges our country faces.”
She continued, saying that “at its core, our country is wrestling with how we ensure that our children have the same opportunity and that same shot at fairness that generations previously have had.”
In his speech, Krueger pointed to economic inequality as the root of these challenges, saying “[T]he rise in inequality in the U.S., over the last three decades, has reached the point that inequality in incomes is causing an unhealthy division in opportunities, and it is a threat to our economic growth. Restoring a greater degree of fairness to the U.S. job market would be good for business, good for the economy, and good for the country.”
Krueger also said, “Not since the Roaring Twenties has the share of income going to the very top reached such high levels,” and that “the increase in the share of income going to the top 1 percent [from 1979 to 2007] exceeds the total amount received by the entire bottom 44 percent of households.”
The middle class, Krueger said, has gotten accordingly smaller. And as inequality has increased, evidence suggests that year to year, or generation to generation, economic mobility has decreased.
Krueger examined the causes of income inequality, including “a rise in the variability in hourly earnings”; “the proliferation of high salaries earned in the financial sector”; the decline of unions, which helped those in the lower middle class earn their way into the middle class; and the rise of globalization.
Krueger then discussed how inequality affects the economy. Along with its effect on mobility, he made the case that the kind of inequality we have in the United States can bring down aggregate demand.
He cited research that finds that “the top 1 percent of households saves about half of the increases in their wealth, while the population at large had a general savings rate of about 10 percent.”
He went on to note that “if another $1.1 trillion had been earned by the bottom 99 percent instead of the top 1 percent, annual consumption would be about $440 billion higher. This would be a 5 percent boost to consumption.” That’s no small potatoes.
He also talked about how inequality hurts “longer-term economic growth.” He cited research supporting this, and said, “Historically, a growing middle class has led to new markets, supported economic growth, and built stronger communities.”
Finally, Krueger discussed what can be done to curb inequality. He discussed the benefits of the Affordable Care Act—which, he said, helps middle-class young adults keep health insurance through their parents, among other things. He also talked about the benefits of the American Jobs Act, which says we need both the payroll tax cut and unemployment insurance benefit extensions. Krueger said that Congress needs to stretch these extensions through the rest of 2012.
Krueger emphasized that “we can’t go back to the … policies that exacerbated the rise in inequality and threatened economic mobility in the first place if we want an economy that builds the middle class.”
We need to root out corruption in the financial sector, embrace the Buffett Rule, “which states that those making more than $1 million a year should not pay a lower share of their income in taxes than middle-class families,” and make sure that all of today’s children have enough food and proper health care and homes, as well as educational opportunities. These things, he said, will help the country as a whole.
“Lastly,” Krueger said, “I want to emphasize that restoring more fairness to the economy would be good for all parts of American society. This is not a zero-sum game. The evidence suggests that a growing middle class is good for the economy, and that a more fair distribution of income would hasten economic growth.”
“Businesses would benefit,” he said, “from restoring more fairness to the economy, by having more middle-class customers, more stable markets, and improved employee morale and productivity.”
Krueger’s takeaway was that in order to fight inequality and ensure that all Americans have the opportunity to succeed, we must focus on policies that rejuvenate the middle class.
For more on this event, see its event page.