Weird’s Deep Thoughts (Weekend Edition): How Inequality Hurts the Economy

Somply, according to BusinessWeek, the gap between the rich and the rest makes for short recoveries

“…Thus the growing chasm in the U.S. between the haves and the have-nots has serious consequences. Societies that manage a narrower gap between rich and poor enjoy longer economic expansions, according to research published this year by the International Monetary Fund. Income trends in the U.S. mean that future U.S. expansions could last just one-third as long as in the late 1960s, before the income divide began widening, says economist Jonathan D. Ostry of the IMF. The average postwar economic boom lasted 4.8 years, according to the National Bureau of Economic Research. The current expansion, which is just 27 months old, may peter out within a few months. Goldman Sachs (GS) said on Oct. 3 that the U.S. would be “on the edge of recession” by early 2012.

“Expansions fizzle sooner in less equal societies because they are more vulnerable to both financial crises and political instability. When such countries are hit by external shocks, they often stumble into gridlock rather than agree to tough policies needed to keep growth alive. Raghuram G. Rajan, the IMF’s former chief economist, says political systems in economically divided countries become polarized and immobilized by the sort of zero-sum politics now gripping Washington. “It makes the politics more difficult, and that makes it more difficult to grow,” says Rajan, now a finance professor at the University of Chicago’s Booth School of Business. “There is no consensus on any of the solutions that are proposed.”

“As rich and poor drift apart, the constituency that favors redistributive tax and spending policies grows. “The guys who are falling behind don’t see much hope of getting ahead and therefore are more focused on redistribution,” says Rajan. Ultimately, unbridled inequality threatens social stability as rich and poor nurse their mirror-image resentments….”

Find out more at http://www.businessweek.com/magazine/how-inequality-hurts-the-economy-11162011.html