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The Effect of Wealth Inequality on the U.S. Economy

The issue of inequality is of great concern for the U.S.; wealth inequality is a rampant problem and has had a profoundly negative effect on the national economy in recent years. This is a problem which has been persisting for decades, with wealth now seen to be concentrating at an ever increasing rate. Since 2009 the combined net worth of the Forbes 400 has nearly doubled from $1.27 trillion to £2.29 trillion, almost equivalent to the GDP of Brazil, and in only 5 years the likes of Warren Buffett and Bill Gates have increased their net worth by over $30 billion each, demonstrating the striking increase in wealth concentration. The Organisation for Economic Co-operation and Development (OECD) claims that inequality has a negative and significant impact on medium term growth, so this is an issue that should take precedent in a time when the U.S. faces the economic problems of debt, deficit and sluggish growth that it currently does.

So where did this problem begin? The problem of wealth and income inequality and its sharp increase in recent decades can be traced back to the 1970’s. Between the 1940’s and the 1970’s the lowest to highest workers experienced similar growth in income, in a period in which a rising tide really did lift all boats. The watershed decade of the 1970’s and the increase in inequality which followed can largely be attributed to one process, that process is called financialisation. Noam Chomsky is a key proponent of the idea, he states that the falling profits in manufacturing in the 1970’s saw a shift away from productive enterprise which led to a process of deindustrialisation and an offshoring of production. This created a shift in emphasis towards financial institutions which led to a concentration of wealth and capital within the 0.1% and a stagnation and decline for the majority; this wealth concentration also created a concentration of political power which accelerated the cycle. Ever since this watershed moment in U.S. history, the top 1% have been capturing an ever increasing share of income growth. This has significantly contributed to the profound economic problems facing the United States today.

The process of financialisation since the 1970’s has left the U.S. with numerous issues regarding manufacturing. Today the U.S. runs a trade deficit in manufacturing; the level of consumption has not declined over the past 40 years, only production has fallen and imports have grown. The offshoring of production initiated due to financialisation has seen a flow of capital out of the U.S. in imported goods, which is having negative economic consequences in terms of the deficit. But the manufacturing sector is suffering from a lack of competitiveness on the international markets, it is estimated in a study by the Federal Reserve that Chinese imports alone are responsible for between 750,000 and 3.5 million lost manufacturing jobs in the 2000’s. All of this is detrimental to the U.S. economy, who should be looking to the manufacturing sector to create jobs and increase exports to address the trade deficit.

It has been shown by the OECD that higher income inequality is associated with lower social mobility. So when considering that the U.S. has the highest inequality rate across the OECD, excluding Mexico and Turkey, there is cause for concern. The lack of shared prosperity over the recent decades has had an impact on social progress, which is contributing to the nation’s problems. The growth in inequality in the U.S. has hindered the accumulation of capital for the majority which undermines education opportunities for the disadvantaged and hampers skill development. Therefore inequality is damaging the U.S. far beyond just individual net worth, it is impacting the education opportunities of the underprivileged and causing a stagnation in social mobility which is significantly detrimental to the future of both the people of the United States, and the economy.

The U.S. is facing mounting economic challenges and their ability to deal with them is understandably coming into question. When a nation has a huge national debt and deficit, rampant inequality and a political system which cannot agree on how to move forward then questions must be raised over their economic future. Changes must be made to the economic system in the U.S. in order to combat inequality. A shift in government policy towards long term investment and redistribution of wealth are imperative and must be implemented in order for the U.S. to be able to face the economic challenges of the likes of China and the E.U. in the future.

Author Biography

Daniel Millward is currently a postgraduate student at the London School of Economics and Political Science (LSE). Daniel’s main areas of interest are U.S. domestic politics, the politics of the EU, U.K politics, human rights, and social justice.

*Cover image ‘Newberg City Flag‘ by Stuart Seeger


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