Inequality stifling growth?

With an election due soon and party conference season in the UK almost completed, it is no surprise that there has been some focus on the widening inequality between society’s poorest and richest.

However it seems it is not only on the politicians’ minds.

Income inequality is on the agenda for annual meetings of the IMF and the World Bank, and it has also been the subject of a discussion on BBC’s Radio 4 between economics editor Robert Peston and two US economists, Amir Sufi and Prof Atif Mian, whose book House of Debt explores the issues of widening inequality making us all poorer.

Why?  Because there is a theory developing that there is a link between the debts of the poorest in the economy and recession, which argues that because the poor have little or no spare disposable income and when there is a slump, and debts outweigh the value of property this group spends much less.

When millions do this, as consumers did following the 2008 Crash, the result is recession.

Could there also be a link between this and the anaemic wage growth that has hit most working people since then? And could this be an argument for boosting their spending power to stimulate economic growth, – either through wage increases at least in line with inflation or by reducing taxation?

Of course SME employers will argue that wage increases are unaffordable given global competition and narrowing margins – so what can be done to break the deadlock?

My own view is that we need to stimulate investment in productivity so that in turn employers can share the gains. What’s yours?

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