Inequality and the disparity between the 1/99% is a topical issue with important implications not just for the fabric of society but for overall economic prospects. So we'd like to clarify here why, from the Functional Finance perspective, income inequality is important utilizing as always the mechanics of money circulation in the economy.
The International Monetary Fund, IMF, put out a post on its blog titled Inequality's Toll on Growth with a podcast of the same issue. According to a new study by the IMF:
"It turns out that making the rich richer by one percentage point lowers GDP growth in a country over five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points."
Why? Basically, the more income you have the less likely you are to spend it all, saving the difference. Now saving is fine in itself, however, when income inequality reaches the extremes we are beginning to experience and those 1% fail to spend all their income the overall effect is to take money out of the economy thus reducing the overall amount that can be spent within the economy.
In the same way that taxes and bank debt repayments take money out of the economy so too the excess saving of the 1% serve to take money out of the economy lowering the overall level of economic activity.