essay improve

Running head: BARRIER TO ECONOMIC STABILITY 1

Mei 2

Taiyuan Mei

Caitlin Kirkley

English 1A

December 9, 2018

Inequality as Barrier to U.S Economic Stability

Inequality has become a pressing concern since many people including economists feel that it causes economic harm. The gap between the rich and the poor is ever increasing and becoming even greater over the years. It affects economic stability and growth by undermining education opportunities to those from poor backgrounds, hindering skills development and lowering social mobility. It obstructs productive investment and limits an economy’s productive and consumptive capacity. The poor people tend to spend more of their income to meet their basic needs. Lower income means lower consumption resulting to a weaker economy. Also, too much spending means there is little left to be saved by such persons yet we know savings are the base for economic growth in the long term. Too much spending among low-income earners obstructs investments that play a significant role in economic growth. Economic growth is hindered by inequality that causes gaps between the poor and the rich. In fact, inequality plays a crucial role in economic growth and stability. Inequality is the biggest barrier to economic stability in the U.S because it leads to higher spending hampering investment.

Inequality, in particular, income inequality seems to have worsened significantly in the U.S since 1980s. It has led to “secular stagnation” meaning that the economy is decreasing in value that it may not easily recover from (Hiltzik). The U.S economic growth and projected future growth seems to be getting worse over time. In fact, the U.S economic growth averaged 2% only since 2013. The situation worsened because there was meager growth in the pre-recession period. Secular stagnation exists though people have different perspectives on its causes and remedies. Some argue that it is caused by an increase in income inequality, slowdown of technological advances that facilitate productivity and lack of investment in infrastructure. Others feel that slow rates of innovation and invention essential for facilitating human productivity contribute to the stagnation being witnessed for centuries. Some recommendations to improve the situation include the government increasing public investment and reducing structural barrier to private investment. This will show its commitment to maintain spending power and reducing inequality thus redistribute income to lower and middle income households (Hiltzik).

The rising income inequality continues to exist both in good and bad times in the U.S. It is considered a historical norm since it has been experienced from the past and is likely to continue in the future. The U.S government fails to take adequate measures such as increase incomes for the poor and middle class to alter inequality like it has done in making childbirth safe for women. The incomes and assets of the rich continue to rise rapidly compared to those of the middle and low class. The rich spend some of their incomes and focus on more investment while the poor have little to spend and lack investments. For instance, larger farmers will make more money than small farmers. They will earn more profit and buy more capital that in return bring them more profits. On the hand, the small farmer might find it difficult to expand his farm because of small profits some of which he could be using to pay debts (Leonhardt 544). This will hinder him from investing slowing down economic growth.

The rich earn enough allowing them to save and make investments. Investments whether small are associated with positive return. This positive return facilitates economic growth. This trend continues over years with the few rich persons contributing to economic development. There could be faster economic development if the low- and middle-income earners had something to save and invest. If the current economic development is facilitated by the few rich, what could it be at if the middle- and low-income earners were also at a position to contribute to it? Unfortunately, they continue to struggle with the income inequality that exists. They continue to spend most if not all they earn to meet their basic needs. This hinders them from investing and enjoying the positive returns from their investments. This hinders them from facilitating economic development through investments. This trend can be stopped by emulating policies that have helped other counties have their middle-class earners earn better incomes in the recent years. Taxes play a crucial role in economic development (Mauldin). The U.S can attack inequality by looking at tax wealth, taxation of the poor and middle-income earners, financing of schools and infrastructure such as roads and transit systems (Leonhardt 546). This should help improve on economic growth.

Rising inequality tends to reduce income growth and in return slow economic growth. Crises too like the Great Recession also contributed to the slow economic growth. The historic recession in the late 2007 significantly affected the U.S economy. An approximate doubling of the household debt income ratio from the 1980 preceded the crisis. If the group consumption income ratio had declined, it could have been possible to maintain the ratio of stable debt to income. Unfortunately, this did not happen in 2006 and the debt income ratio dramatically increased. It led to increased household debt-income ratio that led to collapse of household spending. The bottom 95% consumption income ratio took the fall, concurrently with borrowing constraints even tighter while the top 5% ratio rose. Their rising was accompanied consistently with consumption smoothing. .The rise in inequality seems to have dragged expenditure growth since the Great Recession holding back recovery (Cynamon & Fazzari). Since expenditure is among the major drivers of economic growth, dragging expenditure growth means dragging economic growth.

There is no visible sign that inequality has reversed since the beginning of the recession. From 2006 to 2009, there was a pause in income share increase of the top 5% and it has risen once again steeply. The demand drag caused by rising inequality that was postponed for decades by bottom 95% borrowing is causing a drag in consumption growth and predictably will continue doing so for a few more years(Cynamon & Fazzari). There is a large demand gap caused by slower PCE growth relative to the recession trends that were before. This is evidence of the sluggish recovery of consumption in the Great Recession. To help this out, the group that took the debt in the first place should deleverage. This is the same group that lost out to inequality rising. Consumption must be reduced to re align it to income and pay its debts. Inequality is thorn in the US economy’s flesh that must be confronted even as debt burdens return to more sustainable levels. It would be vital to get a clear understanding that rising inequality is way beyond social justice as an issue. Inequality also compromises the demand engine that was important and necessary for good and hopeful macroeconomics results in the USA before the Great Recession. Greater inequality threatens growth of demand and even unemployment.

Economic growth is influenced by income inequality. Investigating the relationship between income inequality and economic growth changes over time helps illustrate the impact income inequality has on economic growth from the past. It illustrates a negative effect on inequality on economic growth. However, analysis and comparison of time periods 1970-1985 and 1985-1999 fails to illustrate a statistically significant relationship between income inequality and economic growth. There exists a negative association between income inequality and growth though the effect is not adverse (Binatli).

By the mid-nineties, empirical research suggested that there existed a negative effect of income inequality on economic growth. Some researchers like MacDonald and Majeed illustrated that there existed a robust association between income inequality and economic growth on their analysis on GDP from 1970 to 2008. They argued that the poor lack the opportunity to exploit returns on growth that is essential for continued economic growth. However, a quality test performed on available data investigating growth income inequality failed to illustrate a significant relationship on income inequality and economic growth(Binatli). This does not mean that inequality does not affect economic growth, only that their research findings suggest that the association is weak.

According to (Samimi & Jenatabadi) income level of a country could be affecting growth of the country. The authors identify economic globalization as a factor significantly impacting economic growth of Organization of Islamic Cooperation (OIC) countries. High and middle-income countries benefit from globalization that directly promotes growth and through complementary reforms. Globalization affects growth through diffusion of technology, effective allocation of resources and improvement in factor productivity. The U.S is one country with good technology that facilitates production. It embraces globalization that promotes economic growth. However, unequal allocation of resources and income distribution are some factors hindering it from economic stability and growth.

As much as inequality contributes significantly to economic growth, it is not the biggest factor influencing economic growth. Factors like education, infrastructure and innovation contribute significantly to economic stability and growth (Samimi & Jenatabadi). Lack of progress in these areas hinders economic growth. Looking back at Europe and the US in comparison, Europe has grown at a slower rate. Researchers argue that the slow growth may have been due to the European Union’s relatively meager investment of 1.1 % of its gross domestic product in higher education. This is in comparison to the 3% of the U.S. More instances of how education affects growth is in the thirty years after World War 2, Europe presented a faster growth than the U.S. despite having invested mainly in primary and secondary education. Moreover, the Asian miracle, that is high productivity growth in the Asian countries is attributed more with their investments in primary and secondary education other than tertiary and higher education (Samimi & Jenatabadi). This clearly shows importance of different levels of education and their impact to growth. Lack of innovation could hinder maximum productivity in companies negatively affecting economic growth. Poor infrastructure in some areas could hinder flow of goods and development hindering economic growth (Parilla). These are some factors that should be analyzed into depth since they tend to influence economic growth. However, the U.S is an innovative country with good infrastructure meaning that these are some major but not the biggest factors influencing economic growth. The U.S should focus on strategies like income redistribution and establishing stricter income-equalizing policies to promote growth.

Uneven distribution of resources in the U.S is a major challenge to economic growth. In fact, inequality that exists in the country seems to be the biggest barrier to economic stability because it leads to higher spending hampering investment. The middle and low income earners who have a significant percentage in the country’s total population have little to save. Their low salaries and wages are mostly used to satisfy needs leaving them with nothing or little to save. They may lack money to investment and earn profits like the rich persons. Since they constitute a significant percentage of the U.S total population, lack on investment from them is impactful on economic development of the country. They spend much and invest too little if any. Inequality can be addressed through policies to ensure that people from all classes positively contribute to economic development.

Works Cited Binatli, Ayla Ogus. "Growth and Income Inequality: A Comparative Analysis." Economics Research International (2012): doi.org/10.1155/2012/569890. Cynamon, Barry, Z., & Steven M. Fazzari. "Inequality, the Great Recession and slow recovery." Cambridge Journal of Economics (2015): 40(2): 373–399. Hiltzik, Michael. "Is U.S. stuck in secular slump?" 05 November 2014. Los Angeles Times. <https://search-proquest-com.ezp.pasadena.edu/docview/1619820387?accountid=28371>. Leonhardt, David. "Inequality Has Been Going On Forever ... but That Doesn’t Mean It’s Inevitable." They Say / I Say: the Moves That Matter in Academic Writing with Readings. W. W. Norton & Company, 2018.. Mauldin, John. “The 8 Biggest Barriers To Economic Growth.” Forbes, Forbes Magazine, 18 Mar. 2016, www.forbes.com/sites/johnmauldin/2016/03/14/these-are-the-8-biggest-barriers-to-economic-growth/#6534ae425d63. Parilla, Joseph. “Opportunity for Growth: How Reducing Barriers to Economic Inclusion Can Benefit Workers, Firms, and Local Economies.” Brookings.edu, The Brookings Institution, 13 June 2018, www.brookings.edu/research/opportunity-for-growth-how-reducing-barriers-to-economic-inclusion-can-benefit-workers-firms-and-local-economies/. Samimi, Parisa & Hashima Salarzadeh Jenatabadi. "Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities." PLOS ONE (2014): doi.org/10.1371/journal.pone.0087824.