How Inequality Distorts Economics

How Inequality Distorts Economics

The growing global concentration of wealth has made basic data on household savings, the trade deficit, and overseas assets increasingly unreliable.

Satellite view of the Grand Cayman Island. The Cayman Islands have become a major tax haven for wealthy individuals and multinational corporations. (USGS/NASA Landsat/Getty Images)

One of the urgent challenges facing the Biden administration is reversing the ever-worsening maldistribution of wealth. The more billionaires we have, and the more zeroes added to the net worth of Elon Musk, Jeff Bezos, and Mark Zuckerberg, the less there is for everyone else. The only way to lift people out of poverty and economic insecurity is to claw back money from the very wealthy. But there is a political imperative as well. Oligarchic wealth is deeply destructive of democratic governance. Around the globe, most oligarchs have been faithful cheerleaders for autocratic rule. Four years of Donald Trump’s subversion of democracy was not just a bad dream; it will be our future if we fail to rein in excessive wealth.

Oligarchic wealth also poses another, even greater danger: it undermines the stability and health of the global economy.

Not enough attention has been paid to this aspect of the story. In his two brilliant and pioneering volumes on inequality—Capital in the Twenty-First Century (2014) and Capital and Ideology (2020)—Thomas Piketty mainly focuses on the fundamental injustice of oligarchic capitalism and the falseness of the ideologies that justify it. He devotes relatively few words to the horrendous economic consequences of growing wealth inequality. But new strands of scholarship are showing the profound economic irrationality of concentrating vast wealth in the hands of oligarchs.

Many economists had embraced the idea that a “great moderation,” which lasted from 1980 to 2007, signaled that global capitalism had overcome the boom-and-bust cycles of the past. The unexpected severity of the 2008–2009 global financial crisis has led to a rethinking.

In particular, analysts are starting to recognize that the greed of oligarchic elites has inadvertently corrupted some of the key economic indicators on which economists rely. The misleading data has, in turn, made it significantly harder to recognize the profound distortions created by the growing concentration of wealth. There are three distortions that are particularly relevant: on household savings, the trade deficit, and overseas assets.


U.S. Household Saving

U.S. government data shows that through the Great Recession, personal saving in the United States had been trending steadily downward (see chart below). This downturn, which began in the 1970s, was often cited to justify tax cuts for high-income households (I wrote about this trend in the Review of Radical Political Economics in 1995). The argument was that low household saving led to inadequate private-sector investment. In order to stimulate more business investment, it was necessary to lower taxes on the rich.

However, after the Reagan (1981) and Bush (2001 and 2003) tax cuts, the personal saving rate contin...