Below is another useful short and engaging video from former US Labour Secretary and Professor of Public Policy at UC Berkeley Robert Reich. This time, he returns to a recurrent theme, that rising inequality, not least in the US, increasingly constrains aggregate demand and economic growth. As income and wealth become more concentrated at the top of the distribution, due to wages failing to keep up with productivity, the growth of consumption, usually the largest component of aggregate demand, has become dependent on poorer groups going into debt, which itself is unsustainable. This is the underconsumption thesis, which has become influential among many left economists and some politicians.
Richer groups typically spend a smaller share of their income on consumption than poorer groups, so that for the economy as a whole, as long as investment is constrained by consumption rather than by savings, falling inequality will boost economic growth through its effect on raising sustainable consumption. If investment were constrained by savings, then a form of “trickle-down” economics could work, if rising savings led to rising investment. But sluggish underlying growth, notwithstanding the recession and recovery from the Covid crisis, has in recent decades been associated with falling interest rates and rising debt.
Economies have responded to the sluggish domestic demand associated with rising inequality in different ways. Some, such as the US and UK, have overseen rising debt, unevenly distributed among households, firms and the government. For a time this allowed growth to continue and has typically been accompanied by current account deficits, reflecting net borrowing from abroad. Others, such as Germany, have relied on growing net exports (export minus imports) and current account surpluses to sustain demand and growth. Current account surpluses in some countries are of course the necessary flipside of current account deficits elsewhere, since their total sum must be zero: they must balance at the global level. The surplus countries are international net lenders, funding and sustaining the deficit countries.
Crudely speaking, the solution to these imbalances and the unsustainable buildup of debt amid sluggish domestic demand and underlying growth is the same, even if the details vary between countries: policies which reduce the inequality of income and wealth would go a long way to boosting domestic demand, reducing the dependency of growing demand on rising debt or foreign demand reflected in rising net exports. All this has admittedly been complicated by the economic fallout from the Covid crisis, but in the longer term the trend of rising inequality needs to be reversed in order to restore more sustainable and balanced growth trends worldwide.
Reich’s video, which is certainly worth watching, does not go into these details, which concern both the US and the world beyond. But they are an important part of the story.