The idea that our economy is held back by inequality is echoed in the claims of some of the nation's most prominent economists. Princeton professor (and Nobel laureate) Paul Krugman and David Card of the University of California, Berkeley, contend that inequality hurts economic mobility. Princeton's Alan Krueger (now chairman of the White House Council of Economic Advisers) and Columbia's Joseph Stiglitz (another Nobelist) think it dampens economic growth. Along with Raghuram Rajan, former chief economist of the International Monetary Fund, Stiglitz also argues that inequality was behind the financial crisis. Cornell economist Robert Frank and former labor secretary Robert Reich are convinced that it fuels the indebtedness of the middle class. The Massachusetts Institute of Technology's Daron Acemoglu believes that inequality enables economic elites to capture the machinery of government and thus ultimately produces national decline.
But while the credentials of these advocates may be impressive, their arguments are not. Some of these economists seem to think that arguments made for popular audiences do not require the same rigor demanded in academic papers. Others won their well-earned accolades doing groundbreaking research on subjects unrelated to the consequences of inequality and have little expertise in this area. In some cases, these authors examine inequality in America in light of findings from developing countries, failing to acknowledge that the circumstances of those other nations are so different from ours that they render this research inapplicable to the United States. In still other cases, these economists carelessly mistake correlation for causation.
One correction on the above: Robert Reich is not an economist. The Wall Street Journal editorial page started labeling him one during the 1992 Clinton campaign and the label seems to have stuck.
As to the claim that the incomes of most Americans have stagnated during the period in which those of the wealthiest Americans have soared, [Richard] Burkhauser's figures suggest otherwise. His research shows that the middle fifth of the income distribution was actually more than one-third richer in 2007 than it was in 1979. The Congressional Budget Office corroborates this estimate, and research by the University of Chicago's Bruce Meyer and Notre Dame's James Sullivan suggests that the increase may have been 50% or more. Such growth could be called "stagnation" only in relation to the golden age of the post-war boom, when the incomes of the middle fifth of Americans doubled over 20 years. Income growth has certainly slowed for poor and middle-class families since then, and not only in the United States: In a range of European and English-speaking countries, demographics and other factors have combined to yield lower rates of economic growth. But there is simply no clear evidence that this slower growth is being caused by rising inequality.
One correction: Where he writes, "was actually more than one-third richer in 2007," he means "had incomes that were more than one-third higher in 2007." "Rich" refers to wealth, not income, and his data are on income, not wealth.
One argument that I wish Scott had taken on is this one:
There are a number of reasons why, in theory, inequality might reduce growth. It might dampen overall consumption: The rich spend proportionally less of their incomes than the non-rich do, and when a greater portion of the nation's overall wealth flows to those who will not use it for direct consumption, economic activity could decline.
If the rich, by which term, again, I assume he means "the highest-income people," spend a lower percent of their incomes on consumption than others do, then presumably they save it. And that saving translates into investment, which increases the capital stock. So if the claim about the saving rate of "the rich" is true, then growth should be higher. Scott does a beautiful empirical job but the theoretical point he could have made is also strong.