RELEASE: The American Middle Class, Income Inequality, and the Strength of Our Economy – New Evidence in Economics
Contact: Katie Peters
Washington, D.C. — Today, the Center for American Progress unveiled a new paper examining how the strength of the middle class and inequality affect our nation’s economic growth and stability. Despite conventional wisdom that the wealthiest are the ones to drive the economy, this analysis provides evidence that a strong middle class is the real engine of our country’s economy, creating the conditions for families to invest in their children, for businesses and entrepreneurs to take flight, and for quality governance of a strong, stable economy.
Over the past several decades, the United States has undergone a remarkable and troubling transformation, with income growth stalling for the middle class while the incomes for the wealthiest continued to rise dramatically compared to the rest of the working population. The conservative narrative around these changes in the distribution of wealth is that rising inequality should not be a concern since the gains for those at the top will eventually trickle down to the rest of the population. In fact, in the coming weeks, a new book by former Bain Capital executive Edward Conard will further this claim by arguing that the enormous and growing income inequality in the United States is a sign that the economy is working.
The CAP analysis released today finds this conservative theory is in fact untrue. Entitled The American Middle Class, Income Inequality, and the Strength of our Economy, the study explains the dangers of rising inequality and a declining middle class. Authored by CAP economists Heather Boushey and Adam Hersh, the paper summarizes findings from economic research in the academic arena and identifies four ways that the strength of the middle class and the level of inequality affect economic growth and stability, including:
- A strong middle class promotes the development of human capital and a well-educated population. Equality of opportunity is being diminished by the existence of highly unequal economic outcomes, which public educational institutions are increasingly not overcoming. Increasingly, there is evidence that one’s family of origin, rather than talent, determines access to human capital. The contribution of human capital to growth is not only about access to education: Individuals also must be able to make use of their skills, matching talent to appropriate occupations. If inequality stands in the way of those matches, then it is having a pernicious effect on our nation’s growth path.
- A strong middle class creates a stable source of demand for goods and services. Declining social mobility, increasing income inequality, and the tendency for consumption to fall relative to income all suggest mechanisms by which demand could fall and be less than that needed to maintain full employment and maximize economic growth.
- A strong middle class incubates the next generation of entrepreneurs. The two ways that the middle class is important for growth— the development of human capital and strong and stable demand—are also important for fostering entrepreneurship. Moreover, middle-class families can provide financial security and time for entrepreneurs to nurture their ideas and take the risk of starting a new business and high inequality, and a “winner-take-all” system can increase the risks of entrepreneurship in ways that may be a disincentive to many.
- A strong middle class supports inclusive political and economic institutions, which underpin economic growth. In the U.S. context, less inequality and a stronger middle class support more inclusive political institutions and steer politics away from only responding to an economically powerful elite. This provides the foundation for more inclusive economic institutions, which, in turn, promote growth.
“What is clear is that there is a growing understanding among economists that a trade-off exists between high and growing levels of inequality and economic growth,” said Heather Boushey, Senior Economist at CAP and co-author of the report. “Fairness creates economic growth. We have found strong empirical evidence in economics and other social sciences suggesting that a strong middle class and lower income inequality have positive effects on productivity and investment.”
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