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Is Rising Inequality a Hindrance to the US Economic Recovery?

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Listed:
  • Dimitri B. Papadimitriou
  • Michalis Nikiforos
  • Gennaro Zezza
  • Greg Hannsgen

Abstract

The US economy has been expanding moderately since the official end of the Great Recession in 2009. The budget deficit has been steadily decreasing, inflation has remained in check, and the unemployment rate has fallen to 6.7 percent. The restrictive fiscal policy stance of the past three years has exerted a negative influence on aggregate demand and growth, which has been offset by rising domestic private demand; net exports have had only a negligible (positive) effect on growth. As Wynne Godley noted in 1999, in the Strategic Analysis Seven Unsustainable Processes, if an economy faces sluggish net export demand and fiscal policy is restrictive, economic growth becomes dependent on the private sector's continuing to spend in excess of its income. However, this continuous excess is not sustainable in the medium and long run. Therefore, if spending were to stop rising relative to income, without either fiscal relaxation or a sharp recovery in net exports, the impetus driving the expansion would evaporate and output could not grow fast enough to stop unemployment from rising. Moreover, because growth is so dependent on "rising private borrowing," the real economy "is at the mercy of the stock market to an unusual extent." As proved by the crisis of 2001 and the Great Recession of 2007-09, Godley's analysis turned out to be correct. Fifteen years later, the US economy appears to be going down the same road again. Postrecession, foreign demand is still weak and the government is maintaining its tight fiscal stance. Once again, the recovery predicted in the latest Congressional Budget Office report relies on excessive private sector borrowing, and once again, the recovery is at the mercy of the stock market. Given that the income distribution has worsened since the crisis--continuing a 35-year trend--the burden of indebtedness will again fall disproportionally on the middle class and the poor. In order for the CBO projections to materialize, households in the bottom 90 percent of the distribution would have to start accumulating debt again in line with the prerecession trend while the stock of debt of the top 10 percent remained at its present level. Clearly, this process is unsustainable. The United States now faces a choice between two undesirable outcomes: a prolonged period of low growth—secular stagnation--or a bubble-fueled expansion that will end with a serious financial and economic crisis. The only way out of this dilemma is a reversal of the trend toward greater income inequality.

Suggested Citation

  • Dimitri B. Papadimitriou & Michalis Nikiforos & Gennaro Zezza & Greg Hannsgen, 2014. "Is Rising Inequality a Hindrance to the US Economic Recovery?," Economics Strategic Analysis Archive sa_apr_14, Levy Economics Institute.
  • Handle: RePEc:lev:levysa:sa_apr_14
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    References listed on IDEAS

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    1. Lance Taylor & Armon Rezai & Rishabh Kumar & Laura de Carvalho & Nelson Barbosa, 2013. "U.S. Size Distribution and the Macroeconomy, 1986-2009," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2013-1, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    2. José Gabriel Palma, 2009. "The revenge of the market on the rentiers," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 829-869, July.
    3. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos & Gennaro Zezza, 2013. "Rescuing the Recovery: Prospects and Policies for the United States," Economics Strategic Analysis Archive sa_oct_13, Levy Economics Institute.
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    Cited by:

    1. Michalis Nikiforos, 2014. "Distribution-led Growth in the Long Run," Economics Working Paper Archive wp_814, Levy Economics Institute.
    2. Michalis Nikiforos & Gennaro Zezza, 2017. "Stock-flow Consistent Macroeconomic Models: A Survey," Economics Working Paper Archive wp_891, Levy Economics Institute.
    3. Fernando Rios-Avila, 2015. "A Decade of Declining Wages: From Bad to Worse," Economics Policy Note Archive 15-3, Levy Economics Institute.
    4. Dimitri B. Papadimitriou & Michalis Nikiforos & Gennaro Zezza, 2016. "Destabilizing an Unstable Economy," Economics Strategic Analysis Archive sa_mar_16, Levy Economics Institute.
    5. Dimitri B. Papadimitriou & Greg Hannsgen & Michalis Nikiforos & Gennaro Zezza, 2015. "Fiscal Austerity, Dollar Appreciation, and Maldistribution Will Derail the US Economy," Economics Strategic Analysis Archive sa_may_15, Levy Economics Institute.
    6. Michalis Nikiforos, 2016. "Distribution-led Growth through Methodological Lenses," Economics Working Paper Archive wp_879, Levy Economics Institute.
    7. repec:mes:challe:v:58:y:2015:i:2:p:149-159 is not listed on IDEAS
    8. Flavia Dantas & L. Randall Wray, 2017. "Full Employment: Are We There Yet?," Economics Public Policy Brief Archive ppb_142, Levy Economics Institute.
    9. Fernando Rios-Avila, 2015. "Losing Ground: Demographic Trends in US Labor Force Participation," Economics Policy Note Archive 15-7, Levy Economics Institute.

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