Is Economic Growth Sustainable as Inequality Soars?

 In Martin Ford’s prize-winning book  Rise of the Robots: Technology and the Threat of a Jobless Future we came across this chapter on the role of inequality in determining economic growth. As it is directly relevant to the pursuit of our blog, we reproduce it in its entirety below.

As we’ve seen, overall consumer spending in the United States has so far continued to grow even as it has become more concentrated, with the top 5 percent of households now responsible for nearly 40 percent of total consumption. The real question is whether that trend is likely to be sustainable in the coming years and decades, as information technology continues its relentless acceleration.

While the top 5 percent have relatively high incomes, the vast majority of these people are heavily dependent on jobs. Even within these top-tier households, income is concentrated to a staggering degree; the number of genuinely healthy households—those that can survive and continue spending entirely on the basis of their accumulated wealth—is far smaller. During the first year of recovery from the Great Recession, 95 percent of income growth went to just the top 1 percent.

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The top 5 percent is largely made up of professionals and knowledge workers with at least a college degree. As we saw in Chapter 4, however, many of these skilled occupations are squarely in the crosshairs as technology advances. Software automation may eliminate some jobs entirely. In other cases, the jobs may end being deskilled, so that the wages are driven down. Offshoring and the transition to big data-driven management approaches that often require fewer analysts and middle managers loom as other potential threats for many of these workers. In addition to directly impacting households that are already in the top tier, these same trends will also make it harder for younger workers to eventually move up into positions with comparable income and spending levels.

The bottom line is that the top 5 percent is poised to increasingly look like a microcosm of the entire job market: it is at risk of itself being hollowed out. As technology progresses, the number of American households with sufficiently discretionary income and confidence in the future to engage in robust spending could well continue to contract. The risk is further increased by the fact that many of these top-tier households are probably more financially fragile than their incomes might suggest. These consumers tend to be concentrated in high-cost urban areas and, in many cases, probably do not feel especially wealthy. Large numbers of them have climbed into the top 5 percent through assortative mating: they have partnered with another high-earning college graduate. However, housing and education costs are often so high for these families that the loss of either job puts the household at substantial risk. In other words, in a two-income household the likelihood that sudden unemployment will lead to a substantial cut in spending is effectively doubled.

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As the top tier comes under increasing pressure from technology, there are few reasons to expect that the prospects from the bottom 95 percent of households will improve significantly. Robotics and self-service technology in the service sector will continue to make inroads, holding down wages and leaving relatively unskilled workers with fewer options. Automated vehicles or construction-scale 3D printers may eventually destroy millions of jobs[1] . Many of these workers may experience downward mobility; some will likely choose to leave the work force entirely. There is a risk that, over time, more households will end up living on incomes that are very close to the subsistence level; we could well see more shoppers in midnight lines waiting for their EBT cards to be reloaded so that they can feed their families.

In the absence of increasing incomes, the only mechanism that will allow the bottom 95 percent to spend more would be to take on more debt. As Cynamon and Fazzari found, it was borrowing that allowed American consumers to continue driving economic growth over the course of the two decades leading up to the 2008 financial crisis. In the wake of that crisis, however, household balance sheets are weak and credit standards have tightened substantially, so a great many Americans cannot finance further consuming spending. Even if credit again begins to flow to these households, that is necessarily a temporary solution. Increased debt is unsustainable without increased income, and there would be an obvious danger that loan defaults might eventually precipitate a new crisis. In the one area where lower-income Americans will still have easy access to credit—student loans—the debt burden has already grown to extraordinary proportions and the resulting payments will decimate the disposable income of college graduates (not to mention those that fail to get a degree) for decades to come.

While the argument I’m making here is theoretical, there is statistical evidence to support the contention that

inequality can be harmful to economic growth. In an April 2011 report,  economists Andrew C. Berg and Jonathan D. Ostry of the International Monetary Fund studied a variety of advanced and emerging economies and came to the conclusion that income inequality is a vital factor affecting the sustainability of economic growth. Berg and Ostray point out that economies rarely see steady growth that continues for decades. Instead, “periods of rapid growth are punctuated by collapses and sometimes stagnation—the hills, valleys, and plateaus of growth.” The thing that sets successful economies apart is the duration of the growth spells. The economists found that higher inequality was strongly correlated with shorter periods of economic growth. Indeed, a 10-percentage-point decrease in inequality was associated with growth spells that lasted 50 percent longer. Writing on the IMF’s blog, the economists warned that extreme inequality in the United States has clear implications for the country’s future growth prospects: “Some dismiss inequality and focus instead on overall growth—arguing, in effect, that a rising tide lifts all boats.” However, “when a handful yachts become ocean liners, while the rest remain lowly canoes, something is seriously amiss.” 

—Quoted from Rise of the Robots by Martin Short, Basic Books, New York 2015     

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[1] This is a reference to an earlier chapter where the author told us that giant 3D printers were approaching the point of being able to perform all the tasks in house construction (structure, carpentry, plumbing, wiring, finished surfaces, etc.) that are currently done by hand and would in the future replace all manual labor and skills, making construction workers of any kind no longer necessary.  A truly frightening thought.

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