n 2016, 1% of the population possessed the same amount of cumulative wealth as the other 99% of the world. What if we were able to change that? What would occur if the middle class grew and the world no longer experienced such inequality? Ethically, there is something to be said about certain members of society obtaining gross amounts of wealth while others are starving. There will certainly always be inequality in the world, we should, however, try to mitigate it. While there are many ethical and moral reasons why no one person should possess billions of dollars, there are also many reasons why inequality and a lack of the middle class affects the economy negatively.
Simply put, excessive inequality stifles economic growth and contributes to distrust between social groups. Lack of a middle class and the wealth disparity have grown over time. The decrease in the middle class has created disproportionate wealth, with some gaining millions and others not able to afford food or housing. But what if we were able to change the dynamics between social classes? How would the economy function?
Economic growth is hindered by increasing inequality. This study conducted by apolitical demonstrates the impact of inequality on innovation and entrepreneurship. As inequality rises less people decide to get an education; innovation within a country decreases. Aiyar and Ebeke’s study on inequality of opportunity also demonstrate the effect of inequality on innovation by commenting on the loss of opportunity because of inequality. Due to high rates of inequality there is less growth—since many low-income households cannot support higher levels of education—and entrepreneurship decreases. Inequality also disadvantageously affects low-income households’ access to the labor market and investment. Inequality has a negative effect on entrepreneurship and the job market within countries by limiting people who are more disadvantaged. Ultimately, these disadvantages affect the economic growth of entire nations and can have a negative impact on how nations grow.
Inequality also shrinks the market for goods and services, stunting economic growth. The Economic Policy Institute (EPI) found that economic demand is decreasing as wealth keeps going to households that save rather than those that spend. The EPI suggests that since inequality has increased, there is now an “inequality tax” on those households with less money. Through this “inequality tax” low income households are unable to purchase goods and services and the consumption of goods has lowered substantially. EPI states that if the overall wages of low-income households increase by 90%, economic growth will occur. The EPI is concerned with the effect of inequality on the market for goods and services, which affects overall economic growth.
Another issue with high levels of inequality is the impact it has on trust. With less inequality there is more trust between groups of people and between the public and the government. In more homogeneous societies such as Norway and Sweden, surveys indicate that 60% of the population trusts each other. In countries with more inequality, such as Colombia and Peru, less than 10% trust each other. The Pew Research Center conducted a study on trust and distrust in the United States finding that the more disadvantaged groups, those with more inequality, felt less trustful of the government and other people. The surveys also found that about one in four Americans believe that the United States government deserves more trust. The decline in trust in the American people appears to correlate with high inequality.
Inequality has broad implications for the economy; it negatively impacts economic growth and the development of countries. The impact of inequality on economic growth and trust is damaging to nations across the globe. Understanding how inequality is damaging to economics will help us understand why we should promote equality in our countries.