In order to have the best long-term strategy, investors would do well to understand the structural and political forces at play in the economy. The state of income inequality falls into this category. Declining median incomes, as middle income jobs fell victim to Schumpeterian creative destruction, were a feature of the long wave downturn that began in the early 1970s. The use of credit as a palliative was a major cause of the market crash and recession of 2008-2009. Similarly, terrible policy decisions become more tempting as voters, facing diminished living standards and opportunities, grow increasingly dissatisfied and polarization increases. It is our opinion that, far from being a benign aspect of the free market, growth in income inequality increases the risk of both financial and political instability. The challenge it poses will not be easy to address. It is, however, serious enough to pose an existential threat to the American economic model and possibly to the country’s democracy.
This special report will take an in-depth look at current and historical trends in income inequality, its causes and consequences, and possible directions for policy. It focuses on the U.S., but many of the same factors are at play throughout the developed world. It is important to understand is that inequality in the U.S. has been growing significantly in two ways: a hollowing out of the middle class and an increase in the share captured by the very top earners.