Friday, November 28, 2014

[NJFAC] The inability of the bottom 95 percent to generate adequate demand helps explain the slow recovery.

Mounting evidence points to the scary reality that the wealth divide harms the job market.

Some of our recent work suggests that by 2012 the top 5 percent was consuming almost as much, in total, as the bottom 80 percent! ....
Mainstream economists hold that even if most people end up with less money to spend because of inequality, that's ok because other sources of spending, like business investment, will come to the rescue and we'll end up with plenty of jobs.

Our works shows that this is not so. We find that high and rising inequality is now holding back the U.S. recovery from the Great Recession and the lack of purchasing power faced by most people is a job killer not just for a few quarters but also over a number of years. Unemployment may cause wages and prices to fall (or at least rise more slowly), but disinflation and, especially, deflation are not likely to raise total spending. Of course, consumers appreciate lower prices for the things they buy, but lower wages are bad for spending, especially if the household has a fixed mortgage or car payment to meet.

Another important problem is that falling interest rates will not be effective in pushing spending up, at least in a sustainable way. Short-term rates cannot fall much below the near-zero level where they are now. Also empirical evidence implies that low interest rates are not particularly effective at stimulating demand, outside of speculative bubbles like the one we saw in housing prior to the Great Recession.

When prices don't adjust, and monetary policy doesn't cure the demand problem caused by income inequality, we have the potential for persistent, or "secular," demand stagnation — in plain English, a lackluster economy. We argue that this is the current situation in the U.S.....

Here is the paper:

Inequality, the Great Recession, and Slow Recovery
   Barry Cynamon & Steven Fazzari

Rising inequality reduced income growth for the bottom 95 percent of the income distribution beginning about 1980, but that group's consumption growth did not fall proportionally. Instead, lower saving led to increasing balance sheet fragility for the bottom 95 percent, eventually triggering the Great Recession. We decompose consumption and saving across income groups. The consumption- income ratio of the bottom 95 percent fell sharply in the recession, consistent with tighter borrowing constraints. The top 5 percent ratio rose, consistent with consumption smoothing. The inability of the bottom 95 percent to generate adequate demand helps explain the slow recovery.

National Jobs for All Coalition

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