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CSEF - Center for Studies in Economics and Finance

Is growing inequality hurting our economies?

9 June
by Salvatore Morelli, Washington Center for Equitable Growth

The debate over the legitimacy of powerful elites seizing a bigger share of the national income and wealth pie year after year has been gaining prominence in the public conversation. Mark Zuckerberg himself—one of the wealthiest men in the world—remarked that “today, we have a level of wealth inequality that hurts everyone” during his recent speech at Harvard University after receiving an honorary degree.

Researchers and scholars have also begun to clearly break the recurrent classic dichotomy between equity and efficiency pervading conventional economic theory, which led to the neglect of distributional issues for many decades. More broadly, the idea that the understanding of economic inequality “assists our understanding of various fields of economics”1 is now put at the forefront. A clear example of this paradigm change is the realization that transmission mechanisms of monetary policy may be substantially affected by distribution considerations.2

The recent 2007–2008 collapse of the global financial system naturally acted as a catalyst for growing concerns around the increasing dispersion of economic resources within most advanced economies. Subsequently, the landmark book by Thomas Piketty, Capital in the Twenty-First Century, underlined very clearly the risk of the rising importance of inherited intergenerational advantages in transforming our societies into patrimonial capitalistic economies dominated by wealthy dynasties. Yet the main argument of the book rests on how wealth inequality evolution over time may be affected by macroeconomic circumstances—namely by the difference between the average return to capital and the rate of growth of the economy.3 The reverse direction of inquiry—how macroeconomic performance may be affected by the extent of inequality—rests instead outside the scope of Piketty’s analysis and modeling.

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