Justin Fox has an outstanding piece on the effect of income inequality on economic growth. The gist: too much income inequality hurts economic growth, but businesses have pushed for — and will continue to push for — policies that increase income inequality. Read the whole thing.
There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive — the most unequal distribution of income imaginable — will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.(This is a quote from Mark Thomas)
Assuming we’re near or have passed that growth-maximizing level of inequality, in the U.S. at least, the business community as a whole would be better off if the trend toward inequality slowed or reversed. But business people are accustomed to pushing for policies that tend to increase inequality, and are loathe to reverse their stances on tax rates, free trade, and free financial markets. As a result, businesspeople who worry about inequality have over the years tended to focus on improving educational opportunities. But you can’t say those efforts have made a noticeable dent in the inequality trend.
Business folks would seem to be stuck. They need a more equal distribution of wealth and income to continue thriving. But it doesn’t seem to be in any businessperson’s immediate interest — and in many cases contradicts deeply held beliefs — to make the sort of decisions or support the sorts of government policies that might halt the trend toward more inequality.
I would not be surprised to see income inequality get worse and worse in the United States for the foreseeable future. Indeed, “business people are accustomed to pushing for policies that tend to increase inequality”, and corporations run our government. On the other hand, income inequality tends to rise more rapidly on Republican presidents than Democratic ones, so maybe things will stabilize somewhat.