This article posits a link between income inequality and the savings rate. If we accept their fairly well documented premise what does this mean for investment and economic growth? Just because the savings rate has fallen does not necessarily imply a fall in gross national savings. This is to say it is possible that as money is transferred to the rich they would save more. If their savings rate increased enough it would offset the loss of savings.
Unfortunately this is not the case, gross national savings has declined. As a percent of GDP (the proportion of GDP being saved) it declined 7% from 1970 to 2010 (you can see the figures here). This coincides with the rise in income inequality and the fall in the savings rate. Clearly in the transfer of wealth the rich do not save enough to offset the loss from the poor. While the U.S. has not seen a corresponding fall in investment, this is due to the continued influx of foreign investment. This has serious implications for our economic systems long term viability and stability. If, relative to other economies, we cannot remain an attractive investment or if there is a global financial shock there will be serious repercussions.
The government should therefore work to curb inequality, not just because it will benefit the poor, but because it will make for a more stable and viable economic system.
2 comments:
I am not really convinced if this relationship is quite true. As I learned in Research Methods, it is quite easy to derive a correlation between any two things.
I am not sure whether there is a correlation between income inequality and savings rate. I am inclined to agree that income distribution could be a public failure and therefore need the intervention of the government. Also, as indicated in this article, it seems that even the rich earn more and they will not save/invest more money and therefore offset what the poor lost. Therefore, I think the government should regulate the income distribution and reduce the inequality between the rich and the poor. At least, the government should maintain the income inequality between the rich and the poor within an acceptable degree.
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