Economic Growth and Inequality: Why It Matters and What's Coming Next

type="main"> This article makes the case that the recent rise in income inequality in OECD countries reflects profound changes in the economic model that previously resulted in growth, prosperity, and social progress during the second half of the last century. The author begins by citing French economist Thomas Piketty's identification of the key driver of rising income inequality as the recent sharp increase in the share of national income going to capital (defined as interest, dividends and other investment returns) and the accompanying decline in the share going to labor (in the form of wages, salaries, pension, and other work-related benefits). For most of the last 100 years, a successful balance was struck in a majority of OECD countries between the returns to capital and labor. Within the framework of nationally defined economies, labor could effectively advocate for its share of the productivity gains by capital, and governments had the ability to constrain the free movement of capital, set labor compensation standards, and redistribute income through progressive taxation. The author explores how two developments—globalization and the rise of machine intelligence—are disrupting this social contract and reshaping our economy and society. The combination of these two developments, by accelerating the flow of income to capital and away from labor, is eroding the historical relationship between capital, labor, and governments that has long prevailed in most OECD countries. As this happens, we are seeing rising income inequality and the erosion of the middle class, which had been the driver of economic growth for most of the past century. Indeed, the thesis of Piketty's book, Capital in the Twenty-First Century, is that such an effect may well be taking us back to the pre-20th century norm of high income inequality and low economic growth. In his closing arguments, the author suggests that avoiding this scenario will be more complicated than simply raising taxes on capital, as proposed by Piketty. It may well require a fundamental rethinking of the role of employment as the primary mechanism for income distribution in society and how we prepare our workforce for an economy and society in which the concept of work will be radically redefined.