The Burden of Proof in the Inequality/Growth Debate

Take a look at the figure below, which displays comprehensive household income data from the Congressional Budget Office (a fantastic data set).1

The bottom line charts actual household income for the middle income fifth—it’s the average income of households between the 40th and 60th income percentiles. So, it’s households that are richer than forty percent of households as well as poorer than 40 percent of households. Think of it as a representative, if narrow, slice of the middle class.

This income rose by 19.1 percent in the 28 years before the Great Recession (1979-2007), or 0.6 percent per year. Better than zero growth for sure, but, could it have been higher?

The top line shows household incomes that start with middle-fifth incomes in 1979, but then are allowed to grow as fast as the overall average growth rate of household incomes. And since the very rich saw extraordinarily fast growth over this period (241 percent cumulative growth for the top 1 percent over this period!), this made overall average growth run much faster than growth for the middle-fifth—which is why that top line pulls progressively farther and farther away from the bottom line over time.

By 2007, if middle-fifth incomes had grown simply as fast as overall average incomes, then they would be 27 percent higher (about $19,000). This is big money for moderate-income families.

Note what this calculation does not imply: that the rise in inequality (i.e., the growing wedge between average and middle-fifth growth) somehow “hurt average income growth.” And yet it shows that rising inequality is enormously costly to middle-income families. If this rise in inequality ready did “hurt average income growth,” then this would all be worse—the counter-factual where middle-fifth income growth tracked overall average growth would see both the wedge between the two close and the top-line rise faster.

It may actually be true that inequality has hurt growth and my “inequality tax” calculation is too conservative. But it doesn’t have to be to say that rising inequality did big damage to living standards at the bottom and middle.

Of course, conservatives would say that my calculation is wrong because it assumes that we could have redistributed enough to allow middle-fifth families to match average income growth without actively harming average growth. But the conservatives’ assumption is that (nearly by definition) efforts at redistribution harm growth. But it’s an assumption not borne out in evidence. We summarize a lot of this evidence in our JEP piece.

But, again, note who “wins” the inequality/growth argument in the grey zone between “can be proven to hurt growth” and “can be proven to aid growth.” [Update: I made a mess of the following sentence in the original. Corrected now] So long as rising inequality is either bad for growth or neutral, then policy measures to check it will aid middle-income families (actually, the vast majority, but, that’s another piece). In order to win an argument calling for pure complacency on inequality, you really have to prove that rising inequality has been a growth bonanza, and that’s just really hard to see in the data.



1. Note, CBO data has been updated since this came out, and they made a couple of methodological changes that make numbers different from what’s in this chart. I talk about some of those changes in the appendix to this paper, for those who care.