Income and Wealth Inequality and How It Limits Our Economic Potential

By Brian Skinner, Esq.

In an important new book Heather Boushey, the Executive Director and Chief Economist at the Washington Center for Equitable Growth, writes about the transformation underway in economics that is upsetting conventional wisdom about how our nation can deliver strong, stable, and broadly shared economic growth. Unbound-How Inequality Constricts Our Economy and What We Can Do About It (Harvard University Press) examines a change in economic thinking, informed by data and sources of empirical evidence, that begins with an understanding of the ways that inequality obstructs, subverts, and distorts economic growth. Her central theme is that while Adam Smith’s famous invisible hand pushes the economy toward broadly beneficial outcomes, economic inequality acts as a bind, thwarting the idealized market processes as it transforms into social and political power. As she puts it, “A rising tide can’t lift all boats when some can’t even get launched and others, pushed off course and deprived of navigation tools, founder on the rocks.

Boushey explores recent research that makes use of data and powerful computing capabilities to develop an updated understanding of how our economy works. This research uncovers several important economic trends – rising income inequality, rising wealth inequality and less economic mobility. She notes that until recently economists did not consider economic inequality as fundamentally important to understanding the dynamics of the economy. But this has changed. New economic research seeks to understand how economic inequality affects economic, social, and political outcomes. Boushey outlines what this research has uncovered about how inequality obstructs, subverts, and distorts the processes that lead to economic productivity and growth while laying out both the direct effects of inequality and the consequences of those effects.

She argues that a paradigm shift is happening within economics and that this new paradigm needs to be part of the national debate over economic policy, Her book makes the case that policymakers need to understand what economists are learning about how inequality constricts growth so that they can begin the work of removing the obstructions created by that inequality. It is clear that for all of us, our economic fate is determined by who our parents are and the community in which we live. For too many this results in painful limits to their economic opportunity and social mobility. Increased inequality and the ability of those at the top to stockpile opportunity leaves many with no path upward, blocking individuals and families from fully contributing to the economy and society. To ensure that all boats are launched with the proper tools, she contends that policymakers need to focus on policies like universal access to high-quality childcare and pre-school, increased funding for public schools, and prioritizing infrastructure investments that improve public health.

She also makes the important point that removing the obstructions that create inequality can’t happen unless we also limit the subversions to the economy that come with inequality. What she means is that we must enact policies that limit the ability of those with economic power to subvert fair processes and manipulate economic growth in their favor. To do so she suggests that we need policies that reign monopoly power, raise government revenues, increase investment in public goods and services, and boost the collective bargaining power of workers. She argues that we cannot deliver strong, stable, and broadly shared improvements in living standards without addressing the social and political ramifications of economic inequity. While many assert that government should get out of the way and let the market do its work, Boushey responds that it is crucial to recognize that no entity other than government has the ability to act on behalf of the public interest and create a bulwark against the economically powerful.

But that is not all. She asserts that it is also critical that we fight the distortions to macroeconomic processes that would otherwise yield positive social outcomes caused by inequality’s obstructions and subversions.  She outlines several ways we can use democratic government institutions to ensure that economic incentives move the economy toward the most socially useful purposes, including policies that provide jobs with good pay and working conditions for all who need them, and discourage certain uses of capital such as investments in financial products that don’t fund productive activity and credit products that contribute to instability.

Boushey’s comprehensive look at a new generation of economists and their research rising inequality and how it undermines economic growth should be required reading for state and national policymakers. Although her summary of the latest economic research on inequality and its harmful effect on economic growth exposes the deep problems that exist in our economy, it also offers hope that this same research can guide policies that build on our nation’s economic and political traditions to reduce inequality while increasing shared economic growth.

Brian is the former counsel to the West Virginia House of Delegates Judiciary Committee and counsel to the West Virginia Senate Minority Caucus. He was also general counsel to the West Virginia State Health Officer and Commissioner for the Bureau for Public Health. He has almost two-decades of experience as a strategic advisor and chief legal counsel to both executive and legislative branch public officials.