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Evening Must-Read: John Podesta on Income Inequality's Ripple Effect

John Podesta: Income Inequality’s Ripple Effect:

Last week, Barack Obama, delivering the clearest and most powerful economic policy speech of his presidency at an event sponsored by the Center for American Progress, identified “the combined trends of increased inequality and decreasing mobility” as “the defining challenge of our time.” The week before, in his first papal exhortation, Pope Francis robustly criticized “trickle-down theories” of economic growth as having “never been confirmed by the facts”.... Soon after being awarded the Nobel Prize in Economics, Robert Shiller told the Associated Press that inequality was “the most important problem that we are facing now today.”...

The fact is that we don’t know nearly enough about what high inequality means for economic growth and stability. We need a better understanding of how inequality affects demand for goods and services and macroeconomic and financial imbalances. We are in the dark on whether and how inequality affects entrepreneurship, or whether it alters the effectiveness of our economic and political institutions, or how it affects individuals’ ability to access education and productively employ their skills and talents. That’s why we’ve established the new Washington Center for Equitable Growth (WCEG), a long-term effort to support serious, sustained inquiry into structural challenges facing our economy. Our aim is to enable rigorous research on the relationship between inequality and growth through a competitive, peer-reviewed, academic grant program; to elevate the work of young scholars and new voices; and to help make sure cutting-edge research is relevant and informative to policymaking debates.

The basic facts bear repeating. Income inequality in the United States today has reached levels last seen during the Roaring ’20s. Over the last three decades, the top 1 percent of incomes have risen by 279 percent, while the bottom fifth of workers have seen an increase of less than 20 percent. In 1979, the middle 60 percent of households took home 50 percent of U.S. income. By 2007, their share was just 43 percent. These trends have continued since the end of the Great Recession... are aided and abetted by a dominant narrative defining how the economy grows. According to conventional wisdom, inequality may upset or offend us, but it’s a necessary part of a competitive economy.... “Over the years, as I’ve looked for the evidence behind this story, I’ve found it to be flimsy,” Nobel Prize laureate Robert Solow says in a video that premiered last month at WCEG’s launch. “Sometimes there’s not much evidence there at all.”

This tough-love, winner-take-all narrative dominating policymaking is far too limited a way to think about how a complex, modern, diverse economy like ours expands and thrives. The strongest periods of economic growth in the 20th century were also times when incomes rose across the board...