Instability implications of increasing inequality: Evidence from North America

Abstract

Increasing inequality cannot be a long-run steady state — i.e. a trend that can continue indefinitely. Because the bottom 99% and top 1% in the U.S. and Canada have had very different rates of growth of market income since the 1980s, consumption and savings flows have necessarily changed. If aggregate expenditure is to equal aggregate income, the added savings of the increasingly affluent must be loaned to balance total current expenditure — but increasing indebtedness implies financial fragility, periodic financial crises, greater volatility of aggregate income and, as governments respond to mass unemployment with counter-cyclical fiscal policies, a compounding instability of public finances. In Canada and the United States, increasing economic instability is thus an implication of increasing inequality. Either an acceleration of the income growth rate of the bottom 99%, or a decline in income growth of the top 1%, could equalize income growth rates, and thereby stabilize market income shares and macro-economic flows. However, there is no evidence that purely economic forces will produce either outcome anytime soon in Canada or the U.S. — any return to stability depends on political economy.The establishment of social transfer programs, rural out-migration, expansion of school enrolment, increased female employment and declining birth rates are large “one-time” social changes with big income impacts for working families. In Canada and the U.S. such trends helped stabilize inequality from 1940 to 1975, while in Mexico they have reduced inequality (albeit from a high level) in recent years.