Is Unprecedented Inequality the Reason the Economy Can’t Recover?

Business-minded people hear the word “inequality” and their reproductive organs crawl back up inside their bodies reflexively.

The “I Word” smacks of socialism and it runs counter to everything we learn in free-market capitalism and private enterprise. The way it’s supposed to work is that the winners are separated from everyone else because of how smart, hard-working and, yes, occasionally lucky they are.

But what if, after decades and decades of this – along with a rewriting of many rules and the pulling up of ladders after they’ve been used, the club just becomes too hard to join? What if the opportunity  distribution just becomes so prohibitively lopsided that mere effort and chance aren’t going to cut it anymore? And what if The Law of the Jungle can no longer be relied upon to keep the system fair for new entrants?

And more than this, what if rampant inequality is what’s really holding back the economic recovery for everyone?

There are facts and figures that make this case very cogently. The interesting news is that you’re no longer automatically dismissing this idea out of hand, even if you are a believer in free enterprise.

Witness the reaction to my tweet this morning:

That ludicrous stat comes from a new piece by James Surowiecki at the New Yorker that you’re going to want to read:

Open Season (New Yorker)

What do you think? Are we making to much of the wealth and income disparity of this decade – which is unprecedented until you get back to the Gilded Age and Robber Barron society from before the turn-of-the-century.

I’ll also add one more article from this week into the mix, while we’re thinking out loud. Profits are are record highs for US corporations – and yet we’re only reinvesting about twice as much as we’re returning to shareholders in the form of dividends and buybacks. In the 1970’s, corporations were investing 15 times as much – hiring, training, building, R&D, etc. See:

The profits prophet (The Economist)

Every other data point concurs that we’ve just witnessed a massive wealth transfer from the lower, middle classes to the very top of the pyramid, whether intentionally or not. Is this kind of thing what’s causing us the aggravatingly slow pace of economic recovery?