New Study Says Rising Inequality Is Killing the Economy


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.

DOES IT FEEL LIKE POLITICS IS AT A BREAKING POINT?

Headshot of Editor in Chief of Mother Jones, Clara Jeffery

It sure feels that way to me, and here at Mother Jones, we’ve been thinking a lot about what journalism needs to do differently, and how we can have the biggest impact.

We kept coming back to one word: corruption. Democracy and the rule of law being undermined by those with wealth and power for their own gain. So we're launching an ambitious Mother Jones Corruption Project to do deep, time-intensive reporting on systemic corruption, and asking the MoJo community to help crowdfund it.

We aim to hire, build a team, and give them the time and space needed to understand how we got here and how we might get out. We want to dig into the forces and decisions that have allowed massive conflicts of interest, influence peddling, and win-at-all-costs politics to flourish.

It's unlike anything we've done, and we have seed funding to get started, but we're looking to raise $500,000 from readers by July when we'll be making key budgeting decisions—and the more resources we have by then, the deeper we can dig. If our plan sounds good to you, please help kickstart it with a tax-deductible donation today.

Thanks for reading—whether or not you can pitch in today, or ever, I'm glad you're with us.

Signed by Clara Jeffery

Clara Jeffery, Editor-in-Chief

We Recommend

Latest

Sign up for our newsletters

Subscribe and we'll send Mother Jones straight 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

Share your feedback: We’re planning to launch a new version of the comments section. Help us test it.