Tags: NYU | Spence | Inequality | Trouble

NYU's Spence: Growing Inequality Spells Trouble

By    |   Thursday, 23 Jan 2014 09:52 PM

Widening income inequality, coupled with diverging educational levels, is smothering economic mobility, threatening social cohesion and increasing political polarization, argues Michael Spence, a Nobel Prize winner and professor of economics at New York University's Stern School of Business.

The top quartile of income-earners have garnered most of the recent income gains, Spence writes in an article for Project Syndicate. "In the U.S., the gap between the mean (per capita) income and the median income has grown to more than $20,000."

Although not definite, there is a strong link between inequality and political polarization, he points out.

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Labor-saving technology is eliminating routine white- and blue-collar jobs, while lower-value-added jobs involved in producing tradeable goods are moving to developing countries.

"All of this is causing distress, consternation, and confusion," he says. "But stagnation in the advanced countries is not inevitable – though avoiding it does require overcoming a daunting set of challenges."

Spence recommends increasing public investment. "The best way to use the advanced countries’ remaining fiscal capacity is to restore public investment in the context of a credible multi-year stabilization plan. This is a much better path than one that relies on leverage, low interest rates, and elevated asset prices to stimulate domestic demand beyond its natural recovery level."

He also urges structural reform. "All economies must be adaptable to structural change in order to support growth, and flexibility becomes more important in altering defective growth patterns, because it affects the speed of recovery."

Leadership is also critical for building a new growth model, he adds.

Expectations for improvement should be contained, he advises, saying it takes time to feel the impact of deleveraging and public investment.

Growing inequality is a problem because it stifles economic mobility, writes Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, in an article for CNNMoney. There's a strong relationship between parents' income and their children's education and income.

Wealthier families are spending more on their children's education, and the gap on standardized tests between low-income and high-income students is increasing, says Bernstein, a former Obama administration economist. Plus, students from wealthy families are more likely to attend top colleges.

"To many Americans, that's why we worry about the heights to which inequality has grown," he says. "Not because we begrudge the wealthy their success, but because we want our own kids to be able to realize their economic potential."

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Widening income inequality, coupled with diverging educational levels, is smothering economic mobility, threatening social cohesion and increasing political polarization, argues Michael Spence, a Nobel Prize winner and professor of economics at New York University.
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2014-52-23
Thursday, 23 Jan 2014 09:52 PM
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