INEQUALITY DAMAGES ECONOMIC GROWTH

“More interestingly (and more contentiously), [Joseph] Stiglitz argues that inequality does serious damage to economic growth: the more unequal a country becomes, the slower it’s likely to grow. He argues that inequality hurts demand, because rich people consume less of their incomes. It leads to excessive debt, because people feel the need to borrow to make up for their stagnant incomes and keep up with the Joneses. And it promotes financial instability, as central banks try to make up for stagnant incomes by inflating bubbles, which eventually burst. (Consider, for instance, the toleration, and even promotion, of the housing bubble by Alan Greenspan when he was chairman of the Fed.) So an unequal economy is less robust, productive, and stable than it otherwise would be. More equality, then, can actually lead to more efficiency, not less. As Stiglitz writes, “Looking out for the other guy isn’t just good for the soul—it’s good for business.”

James Surowiecki, “Why the Rich Are So Much Richer,” in the New York Review, September 24, 2015, pp: 32-36.