Income inequality in the United States hampers growth and forces up debt. In advanced economies in which investment is not constrained by scarce savings, high levels of income inequality lead automatically to either more unemployment or more debt. Such inequality undermines not only the health of the economy, but eventually also the rich.
Debt is rising more quickly in the United States than most people would prefer. This is happening in part because the U.S. current account deficit and the country’s high level of income inequality distort the structure and amount of American savings.
Democracies will increasingly have to choose between raising wages and redistributing income or maintaining free trade and capital flows. Because they are likely to choose the former, the world may face a long-term reversal of globalization.
Policies that increase income inequality can in some cases lead to higher savings, higher investment, and greater long-term growth. But, in other cases, such policies either reduce growth and increase unemployment or force up the debt burden. What determines which of these outcomes takes place is whether or not savings are scarce and have constrained investment.
A deep grounding in economic and financial history is important for modern economic analysis.
If the world does indeed face another decade or two of “superabundant capital” in spite of economic stagnation and slow growth, the historical precedents suggest a number of consequences.
China’s consumer price index (CPI) and producer price index (PPI) data suggest that China is facing deflationary pressures. Beijing must tackle the country’s debt and create alternative sources of demand to address them.
A slowing Chinese economy might be good or bad for the world, depending on domestic savings and domestic investment.
Policies that affect the savings rate of a small country can have more-or-less predictable domestic impacts because the global economy is so large that domestic policies are not affected by external constraints. But with a large economy, the analysis changes.
Rising inequality is inextricably tied to economic imbalances and, in a context of limited productive investment opportunities, the only sustainable outcome is sharply higher unemployment.