1. Home
  2. policy
  3. economy
  4. news
  5. The massive gap between rich and poor Americans costs the US economy more than $300 billion every year, study says

The massive gap between rich and poor Americans costs the US economy more than $300 billion every year, study says

Ben Winck   

The massive gap between rich and poor Americans costs the US economy more than $300 billion every year, study says
  • The US wealth gap is sapping economic growth, the Economic Policy Institute said in a study.
  • The top 10% of earners are the only ones to have their income share grow since 1979.

Solving the US's massive wealth gap could lead to a huge boost for economic growth, according to a new study from the Economic Policy Institute.

Income inequality has plagued the US economy for nearly 50 years. The phenomenon first emerged during the postwar era in the 1970s, when surging inflation eroded households' buying power and pulled the US into a period of weak growth and rising prices. The wealth gap's rapid growth slowed in the early 2000s, but there's been no sign of reversal since.

That left about 1.5% of economic growth — roughly $309 billion — on the table by the end of 2018, EPI economists Josh Bivens and Asha Banerjee said in a report published Tuesday. By redistributing wealth from lower-income households to the wealthiest Americans, overall spending slowed and left less fuel for economic growth.

Put another way, the government would have to spend about $300 billion on "well-structured" stimulus every year if it wanted to undo the income-inequality drag on growth, according to the report.

The reason for the weaker spending has to do with an economic measure known as the marginal propensity to consume. The metric tracks how much of a pay increase a consumer will spend instead of saving it.

Lower-earning Americans tend to have a high MPC since they often have a list of things to buy that they haven't been able to afford, meaning they spend a larger share of their earnings when they receive a raise. On the other hand, wealthier Americans, who tend to already have enough money to satisfy most of their day-to-day needs and wants, typically save most of their pay bump, leaving it to sit in savings accounts or financial assets.

That disparity is behind the decline in demand, the economists said. The share of income going to the top 10% of earners has grown since 1979 while the rest of the population has seen their share shrink, according to the study.

At the same time, the top 1% of earners have been saving a larger share of their income. That's left less cash with the Americans with the greatest likelihood to spend it, in turn constraining economic growth by reducing overall spending.

Government actions — and inaction — also contributed to income inequality over the past several decades, the team said. Policy choices chipped away at workers' bargaining power over the years, leaving low- and middle-income households with less firepower for winning raises. While overall productivity rose 60% from 1979 to 2019, hourly wages for nonsupervisory workers rose less than 14% over the same period.

"Reduced worker bargaining power in the labor market is a key driver of the rise in income inequality before taxes and spending, which means that policies that build worker power can help offset these trends," Banerjee said.

Lawmakers have failed to fight inequality with a more progressive tax-and-benefits system, the economists added. Taxing wealthier households more and using government funds to bolster the social safety net would help close the wealth gap and transfer more cash to those who are more likely to spend it. Congress has also allowed for periods of weak demand to persist without lifting government spending to spur activity, further allowing for the gap to widen.

"Without policy changes, inequality will likely drag on household spending, further slowing overall economic growth in the future as well," the team said.

Reversing the trend will require a serious shift toward pro-worker policies and a greater focus on progressive taxation, according to the report. In today's 50-50 split Senate, it's unlikely either will arrive in the near term. But as fears of slowing economic growth and potential recession loom, tackling income inequality could be one way to juice spending and boost growth.