The American Middle Class, Income Inequality, and the Strength of Our Economy – New Evidence in Economics

Source: Heather Boushey, Adam Hersh, Center for American Progress, May 2012

From the summary:
…What boosts productivity or creates incentives to invest? Economists differ in their specific answers to these questions, but the different theories point to five primary factors:
• The level of human capital and whether talent is encouraged to boost the economy’s productivity
• Cost of and access to financial capital, which allow firms and entrepreneurs to make real investments that create technological progress to use in the economy
• Strong and stable demand, which creates the market for goods and services and allows investors to plan for the future
• The quality of political and economic institutions, including the quality of corporate governance as well as political institutions and a legal structure that enforces contracts
• Investment in public goods, education, health, and infrastructure, which lays the foundation for private-sector investment

… Strong empirical evidence in economics and other social sciences suggests that the strength of the middle class and the level of income inequality have an important role to play for each of these five factors boosting productivity and spurring investment….
We have identified four areas where literature points to ways that the strength of the middle class and the level of inequality affect economic growth and stability:
• A strong middle class promotes the development of human capital and a well-educated population.
• A strong middle class creates a stable source of demand for goods and services.
• A strong middle class incubates the next generation of entrepreneurs.
• A strong middle class supports inclusive political and economic institutions, which underpin economic growth.
We detail the evidence for these four points in the main pages of our paper, but briefly we encapsulate the economic research here. As we will demonstrate, the ways in which a strong middle class is important for economic growth are both interrelated and mutually reinforcing.

Leave a Reply