There's a new element in the debate over U.S. income inequality, and it's one that may actually get our political leadership talking about ways to address the issue: businesses are beginning to notice that their middle-class customers have disappeared.
The consumer market is beginning to look like a sandwich without meat in the middle--there are enough wealthy customers to keep the luxury market humming along, and a growing demand for cheap no-name and other bargain products.
The phenomenon has been reported by Matthew Yglesias of Slate.com and more recently by Nelson Schwartz of the New York Times. As we reported here and here, it's been building for years. But it really picked up steam after the last recession, when the imbalance in income between the top 1% and everyone else has really taken off.
Most economists view the stranglehold of the wealthy on U.S. income and wealth as a problem--it leads to slower overall growth and more volatility. As economist Jared Bernstein has observed, it also promotes the creation of asset and credit bubbles, which have a tendency to burst, taking the rest of the economy with them.
The most important analysis of the economic impact of inequality has come from Barry Z. Cynamon and Steven M. Fazzari of Washington University in St. Louis. In a paper published last month, they ask two questions: "First, did rising inequality contribute in an important way to the unsustainable increase in household leverage that triggered the collapse in consumer demand and the Great Recession? Second, has the rise in inequality become a drag on demand growth...that has held back recovery?"
Their answer to both questions is yes. In simpler terms, rising inequality before the recession prompted U.S. households to borrow more to keep up their spending; when the debt frenzy ended (because of the bursting of the housing bubble) the economy crashed. Since then, the demand drag caused by the effect of inequality on the bottom 95% has held back recovery. The impact of inequality on the recovery, compared with previous recoveries, is shown in this stunning graph from their paper.
Amazingly, some economic pundits still want to ignore the implications of this trend for public policy. One is Robert Samuelson of the Washington Post, who this weekend acknowledged that "the gap between the rich and the poor is enormous, wider than most Americans would (almost certainly) wish," but dismissed "economic inequality (as) a misleading intellectual fad, blamed for many of our problems." In fact, he wrote, "economic inequality is usually a consequence of our problems and not a cause."
For years, the problem of economic inequality has been treated as an abstract. It's getting more real by the minute. The struggles of the bottom 99% are directly related to the gains of the top 1%. The consequences of this imbalance are finally being recognized, and the sooner it's addressed by policymakers, the better it will be for rich and poor alike.