How Income Inequality Is Holding Back the US Economy

Stagnant household income and wealth creation among the bulk of the population means less money is circulating which reduces economic stimulation and growth. JL


Justin Lahart reports in the Wall Street Journal:

The median U.S. household had income of $63,200 last year. That was a bit more than in 2017.But the 2018 figure was even with 1999 considering that the U.S. economy grew by an inflation-adjusted 48% over the same period. It reflects shifts in the economy by which the top 20% accounted for 52% of household income last year. Inequality may change the way the economy works. Rich people are less likely to spend additional income, leading to reduced growth. And because the rich tend to invest that money, it can lead to increased asset prices. Inequality might  have created the bind in which easy-money policies failed to ignite growth.
When it comes to money, America has always had winners and losers, but the widening gulf between the rich and the bulk of U.S. households may be making almost everybody worse off. That includes investors.
Income data released by the Census Bureau on Tuesday showed that the median U.S. household—the one in the statistical middle—had income of $63,200 last year. That was a bit more than the $62,600, adjusted for inflation, that the median household made in 2017. And it is well above the $56,750 that new data, adjusted for methodology changes, show the median household made in 2014, when many Americans were still smarting from the aftermath of the financial crisis.

But the 2018 figure was basically even with what the adjusted data show for 1999. Considering that the U.S. economy grew by an inflation-adjusted 48% over the same period, that is more than striking. It reflects shifts in the economy by which upper-income tiers are capturing more of the economy’s gains. The top 20% accounted for 52% of household income last year, compared with 49.4% in 1999. A similar dynamic is going on with wealth; Federal Reserve data show a growing share of U.S. net worth accruing to the rich.
There is a heated debate over where income and wealth inequality stem from, with factors including globalization, the collapse of unions, changes in tax policy and rising demand for high-skilled over lower-skilled workers all seen as potential drivers. But the effects of inequality are just as important.
For starters, there are political considerations. The populism that President Trump tapped into in the 2016 election was driven in part by a feeling among Americans that the economy was passing them by. Leading Democratic presidential candidates have embraced a smorgasbord of positions aimed at combating inequality that could pinch investors, including higher taxes on capital gains, raising the corporate income tax and treating carried interest as ordinary income.
Indeed, the Business Roundtable’s decision last month to change its mission to take into account “all stakeholders”—a group that includes employees, customers and society, as opposed to just shareholders—can be seen as a response to political environment in which attempts to undo inequality could put companies at risk.
But inequality may also change the way the economy works, points out Karen Petrou, who runs policy-analysis firm Federal Financial Analytics Inc. Rich people are less likely than others to spend additional income, for example, leading to reduced growth and inflation. And because the rich tend to invest that extra money instead, it can lead to increased asset prices.
Inequality might therefore have helped create the bind the Federal Reserve finds itself in, in which its easy-money policies have failed to ignite growth and inflation the way it expected them to. And for investors it may be creating an environment in which returns are increasingly hard to come by.