Why Fixing the Wealth Gap Will Spur Innovation

There are two main conversations to have about the economy: How to make it bigger, and how to share the gains. For the last several decades, the dominant strain in public discourse has been the former conversation: How to spur innovation to create faster growth, escape recessions, and increase productivity and wealth.

What’s been lacking is a proper discussion of how all the gains we saw up until the economic doldrums of the last decade culminated in the lesser depression of 2008. We still don't understand why the linkage between productivity and wage increases has broken, why a decade of tax cuts has not been sufficient to spur robust growth, and most importantly, why the top 1 percent of Americans saw their after tax income increase by 10 percent while most Americans saw theirs decline 2 or 3 percent.

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Some economists argue that high income inequality helped inflate the housing bubble whose collapse triggered the financial crisis.

There’s no question that economic growth is critical to getting us out of our current doldrums, but as every new occupation and electoral ad remind us, the first step toward expansion is grappling to some public consensus on the distribution question: At its most reductive, why did the banks come out of the financial crisis so profitably while unemployment has stayed so frustratingly high?

It’s especially important as political leaders in Washington wrangle over the budget deficit, at the heart is a firmly redistributionist enterprise, its biggest challenges revolving around the public provision of health insurance and the appropriate level of taxation. This comes as transfer payments to low-income households have declined in recent decades.

The economic reset needed to get the economy on the right track demands confidence from people around the country that business practices and economic policy will benefit everyone, not just those at the top. Corporate taxes can’t be reformed without confidence that firms are just gaming the system, public infrastructure can’t be built without confidence that money is well spent, and perhaps more importantly, consumers spending won’t increase until consumers get more money to spend.

There’s even research indicating that income inequality hurts innovation: Without the large market that a robust middle class provides, innovative companies don’t have buyers for their products, and without a competitive labor market and increasing wages, they don’t have much incentive to innovate on the production side, either.

All that means that if we want growth, we need to talk about who it’s going to and no just how it’s getting here. Redistribution is the new innovation.

Photo via (cc) Flickr user _PaulS_