New Study Says Rising Inequality Is Killing the Economy

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


Non-rich people tend to spend 100 percent of their income, or close to it. Rich people don’t. They spend, say, 50 percent of their income and save the rest. This difference is called the “marginal propensity to consume,” and it seems like it might be a problem if income inequality is rising. The problem is that as rich people get a larger share of total income, total consumption goes down. Here’s an example:

The question, of course, is how big the MPC effect is. Several years ago I investigated this and concluded that it really wasn’t very big. It seems like it should be, but it just wasn’t.

Today, however, Larry Summers directs our attention to a new IMF paper that suggests MPC actually does have a big impact. The authors look at two effects. First, as middle-income families fall into lower income groups, they spend less. Second, as a larger share of income goes to the rich, average MPC goes down. Both of these effects reduce total consumption, which in turn acts as a drag on the economy. Here’s the relevant chart:

MPC alone reduces consumption by nearly 2 percent, or roughly $200 billion per year. This is still not a gigantic effect, but it’s noticeable. And when you add in the direct spending effect of income polarization, it’s closer to $400 billion per year. That means we’re losing a lot of consumption—which we need—and gaining a lot of capital—which we don’t. The world is so awash in capital these days that you can (literally) hardly give it away.

Now, the authors use some novel estimating techniques in their paper, which is why they come up with a stronger effect than previous studies. The folks with PhDs will have to fight over whether they’ve done their sums correctly. But if they have, it means that increasing income inequality is a lot more than just a matter of unfairness. It’s also a real drag on economic growth.

WE'LL BE BLUNT:

We need to start raising significantly more in donations from our online community of readers, especially from those who read Mother Jones regularly but have never decided to pitch in because you figured others always will. We also need long-time and new donors, everyone, to keep showing up for us.

In "It's Not a Crisis. This Is the New Normal," we explain, as matter-of-factly as we can, what exactly our finances look like, how brutal it is to sustain quality journalism right now, what makes Mother Jones different than most of the news out there, and why support from readers is the only thing that keeps us going. Despite the challenges, we're optimistic we can increase the share of online readers who decide to donate—starting with hitting an ambitious $300,000 goal in just three weeks to make sure we can finish our fiscal year break-even in the coming months.

Please learn more about how Mother Jones works and our 47-year history of doing nonprofit journalism that you don't find elsewhere—and help us do it with a donation if you can. We've already cut expenses and hitting our online goal is critical right now.

payment methods

WE'LL BE BLUNT

We need to start raising significantly more in donations from our online community of readers, especially from those who read Mother Jones regularly but have never decided to pitch in because you figured others always will. We also need long-time and new donors, everyone, to keep showing up for us.

In "It's Not a Crisis. This Is the New Normal," we explain, as matter-of-factly as we can, what exactly our finances look like, how brutal it is to sustain quality journalism right now, what makes Mother Jones different than most of the news out there, and why support from readers is the only thing that keeps us going. Despite the challenges, we're optimistic we can increase the share of online readers who decide to donate—starting with hitting an ambitious $300,000 goal in just three weeks to make sure we can finish our fiscal year break-even in the coming months.

Please learn more about how Mother Jones works and our 47-year history of doing nonprofit journalism that you don't elsewhere—and help us do it with a donation if you can. We've already cut expenses and hitting our online goal is critical right now.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate