If We Address the Gap Between Rich and Poor, We'll Fix the Economy

Lost amid all the chatter about fiscal cliffs, immigration reform, replacing Hillary Clinton and gun control is any conversation about our growing problem with income inequality. Even the Pope feels strongly enough about the inequality to include it in his annual New Year’s speech. If we are to have a real discussion about the growing problem, two things must happen. First, we must recognize that income inequality is a problem. Second, we must accept that it is a product of our system and isn’t going anywhere. Once we accept that it is a problem and it is not going anywhere, we can begin to work on ways to minimize its impact on our economy and families' abilities to build wealth.

To get the conversation moving, we need to understand why the inequality is a problem. Between 1979 and 2007, there was a trend between top and bottom earners. During that time, top earners saw their incomes triple when adjusted for inflation, while the bottom 80% saw minor improvements over 30 years of about 20%. The impact this has on the economy was exacerbated by the great recession. The reason is simple. The drivers of consumer spending are largely lower earners, while higher earners save more. The recession hurt the ability of lower earners to spend, creating a drag on demand and thus damaging the economy.

Now, understanding why income inequality is a problem, we need to also understand that it isn’t going anywhere. Inequality is a product of our system. Unless we change systems, it will always be a part of our social makeup.

In a post for the Harvard Business Review, Branko Milanovic breaks down why income inequality is here to stay. He examines the different approaches of political philosopher John Rawls and economist John Roemer when it comes to income distribution. The philosophies of both men come to the similar — and, I believe, accurate — conclusion that no matter how you spin the distribution, on some level there will always be inequality with income. It is the way our system is set up; we need both skilled and unskilled labor, and they are compensated at different levels. As a result, we have a system that creates two different faces.

When everyone — liberals included — comes to grips with the realities of the existence of income inequality, we can begin to focus on ways to minimize its impact on the economy. A solution to this is not to put a cap on top earners, but rather to lift the floor on bottom earners. Lifting the floor does not necessarily need to come from raising the minimum wage, but rather from creating a living wage.

But creating a living wage is not a federal issue. It would be unrealistic for the federal government to pass a living wage when the cost of living is not consistent across the country. Instead, local governments and municipalities need to pass living wage ordinances. This way, the varying cost of living standards can be addressed.

Critics of living wage ordinances push back on the cost to businesses and the impact it could have on the fiscal health of the local government. However, a study by the Economic Policy Institute shows how those issues are relatively nonexistent. An older study by the National Bureau of Economic Research also found that, at a minimum, living wage ordinances can help to achieve modest reductions in urban poverty.

As full time workers are able to earn more, they have an increased ability to build wealth and thereby mitigate the impact that income inequality has on the economy. However, in order for us to get there, we have to be able to have realistic conversation about this inequality. 

Conservatives need to understand that income inequality impacts spending and therefore impacts the economy. Liberals need to realize that we have a society based on capitalism, and as a result, income inequality will always be a part of the equation. Once we get there, we can have real conversations about solutions to mitigate the negative impacts of the inequality and get our economy moving again.