Wall Street is worried about inequality?

This story appears in the Q&As with Vinnie Rotondaro feature series. View the full series.

by Vinnie Rotondaro

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First, Standard & Poor's. Then Morgan Stanley. In just two months, two Wall Street titans have issued reports on the dangers posed by economic inequality. (Here is S&P's and here is Morgan Stanley's.)

Pope Francis has called economic inequality "the root of social ills," a blunt denunciation driven by moral concern: the breakdown in social solidarity caused by inequality, the devaluing of human life. An "economy of exclusion and inequality ... kills," Francis has said.

That's not so much where Morgan Stanley and S&P are coming from. They're more concerned with what inequality might mean for investors, people looking to make a "killing" in the market. Inequality slows down economic growth, after all. That's the argument made in both reports. And that's what makes the reports themselves all the more surprising.

Once confined to the realm of academia, the anti-inequality argument has climbed all the way to the golden gates of Wall Street -- a bitter irony considering that inequality squashes social mobility out in the rest of America.

NCR spoke with the Economic Policy Institute's Josh Bivens, author of Everybody Wins Except for Most of Us: What Economics Teaches About Globalization, to learn more about what these Wall Street reports mean.

NCR: What do we have here? Two big Wall Street institutions engaged in public hand-wringing over economic inequality. What does that tell us?

Bivens: I think it represents a growing fear that the really large increases in inequality we've seen over the past generation are actually threatening to become a drag on aggregate demand, which could in turn make the economy grow much more slowly and make it much less likely to achieve a full recovery.

We've seen people like Larry Summers and Paul Krugman, blue chip economists, increasingly alarmed by what they call "secular stagnation." That's basically another way of saying an economy that will not generate enough demand growth to get back to pre-Great Recession levels of health.

There's a real possibility that inequality is part of this stagnation. The mechanism works like this: As more and more income goes to the very top instead of the bottom and the middle, people at the top tend to save a significantly large portion of their income while people at the bottom and in the middle tend to spend almost their entire paycheck out of necessity. So as you transfer more money and more income to people who tend to save it, you have an economy that has real trouble generating enough demand and spending to keep everybody employed. Both of those Wall Street reports are basically taking very seriously the idea that the rise in inequality has the potential to put a kind of macroeconomic drag on future growth.

Did the reports make any new arguments?

No, not that I've seen. What's really new is that it's Wall Street saying it. And I'll say, the Wall Street firms, their macro-forecasting teams are usually quite reasonable. Whatever you think about the social utility of Wall Street in general --

They need to have accurate investing information.

That's right. They have a monetary interest in not being blindsided by the economy. They have to be very reasonable and pragmatic, and I think inequality is something reasonable and pragmatic people worry could hold back a full economic recovery.

You once said that the rapid increase in American inequality "was not an accident." If it's not an accident, then what is it?

The way I see it, the rise in inequality that we've seen, starting in the 1970s and rising pretty steadily through the following decades, can be explained by a bunch of intentional policy decisions. The decisions have basically undermined the bargaining power of low- and moderate-wage workers and shifted that power to corporate managers and people who own capital.

There's a whole menu of policy items. One of the most obvious is the minimum wage. The federal minimum wage has been allowed to be eroded by inflation for decades. Today, the minimum wage, adjusted for inflation, is a good 30 to 35 percent lower than it was in 1968, even though we have an economy that is literally twice as productive and twice as large. Yet somehow, we cannot afford a minimum wage worth what it was in 1968.

Another: Before the Great Recession, we had macroeconomic policymakers, both at the Federal Reserve but also in Congress, who put a much higher priority on keeping inflation down than on keeping unemployment down. Low- and moderate-wage workers really need low rates of unemployment to have the bargaining power and to get real wage increases. The late 1990s was the one brief period in the past generation where unemployment got to 4 percent for an extended period of time, and you saw across-the-board wage growth.

I also think about trade policy. We put our low- and moderate-wage workers into direct competition with other workers around the world. But we don't put our capital into direct competition. Those trade agreements are very, very long, and most of the length is used to specify how protection for capital will be harmonized up. When we signed NAFTA, for example, there was all sorts of weird stuff in there about intellectual property protection, about how to make sure that other governments enforce, say, Microsoft's claims on copyrights.

Finally, I would point to the playing field around the ability of workers to form unions, and collective bargaining. We've seen employers get increasingly aggressive in firing union activists, and we do not have a National Labor Relations Board that has kept that playing field level. I think that's also a kind of policy choice.

So all around the policy landscape, levers have been pulled. They may not necessarily look alike, but when viewed through the frame of "What does this do to the bargaining power of low- and moderate-wage workers vs. corporate managers and capital owners?", a common thread begins to emerge.

The S&P report said inequality helps create a boom-and-bust economy. Is this true?

I think it's mostly right. I think it still needs to be completely nailed to the wall, empirically speaking. But it sounds very, very plausible to me. There are two ways people think it works. One is that inequality is associated with very slow growth in living standards for people at the low end and in the middle and very high growth at the top. So in order to get some living standards growth for the middle and the low end in the face of flat incomes, a lot of borrowing is needed. Borrowing makes the economy fragile, and you get a boom-bust economy.

I would also argue that the people at the top have pretty volatile savings rates. When the stock market booms, high income households really do spend a lot of money and don't save as much. The opposite holds true when it doesn't boom. So they spend a lot in some years and pull back in others.

In addition to saying that inequality isn't an "accident," you also said that it's "not an act of nature," and that got me thinking about global warming. Global warming leads to erratic, devastating weather events. Inequality leads to a boom-and-bust economy. Both promote volatility. Both disproportionately affect the poor. In both cases, short-term thinking trumps long-term thinking, to say nothing of basic common sense. Do you see anything there?

Well, yeah, when you say it like that, there are definitely some striking parallels. Obviously there's no necessary mechanical link between the two, but to my mind, when I hear about those two things, climate change and the problem of rising inequality ... I think they can both seem very scientific and abstract ... but to my mind they're both mostly driven by profound political failures. They're both solvable, I think, but it's entrenched interests that are keeping us from solving them. They are political tragedies, first and foremost.

A recent study out of Princeton University and Northwestern University argues that the U.S. is no longer a true democracy. Instead, the report contends, it is an oligarchy in which the rich determine public policy. If this is true, what does it tell us about the future of inequality in America? 

I'll preface this by saying that I am not a political scientist. But I do know that there is some very good work by a political scientist named Larry Bartels that has shown that legislators are much more sensitive to the policy preferences of their rich constituencies than their low- and moderate-income constituencies. That really does raise the specter of inequality as a self-reinforcing trend: As more income goes to the top, it increases the political power of the people at the top, who then push for policy changes to direct ever more money their way. It sounds like an awfully plausible explanation for why this has been such a tough trend to arrest.

It requires a political solution, but in and of itself, it makes a political solution more difficult. So it's distressing in that way. But the only fix will be through politics, one way or the other, so we have to figure out a way to get it done. And we've definitely done some useful things on inequality when we've had a government that is more concerned with it. Between 2008 and 2010, when Democrats had control of the House and Senate, it was a time of a lot of legislative activity. And while it may not have all been completely optimal from my point of view, at least it pushed in the right direction.

The S&P and Morgan Stanley reports suggest it is in our best economic interest to mitigate inequality. On the religious side of the question, people like Pope Francis stress that it is in our best moral interest. Is it fair to say that a moral market is in fact a healthier market?

I think an American economy that generated less inequality -- and particularly one that generated less inequality because we affirmatively change our policies to direct more resources to the bottom part of the income distribution -- we would be a healthier overall economy, and not just one with less inequality. We would have a less fragile economy. We would have more durable economic growth. And if we got resources more evenly distributed over the generations, we would greatly expand economic mobility and economic opportunity for people.

[Vinnie Rotondaro is NCR national correspondent. His email address is vrotondaro@ncronline.org.]

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