The disparity in income and accumulated wealth between what has become known as the 1% and the rest of the population has rightly become an important political issue. Inequality has become shorthand for fears about the political clout money affords those who can buy elected representatives at the expense of the popular will. While the concentration of wealth raises concerns about the fragmenting fabric of society and declining prospects for the American Dream due to generational wealth and the advantages therein. In terms of the economic system, disparity in the distribution of incomes has a negative effect on demand that policy makers would do well to act on to support the public interest.
Mohamed El Erian in an interview with LinkedIn makes the point that high incomes lead to high savings leading to lower demand in the overall economy resulting from less money circulation. In economic speak, their propensity to spend declines after a certain level and goes unspent into the economy. Because there is a, relatively, set amount of money in the system failure to spend reduces demand and overall output.
El Erian writes:
"In the last few years, the global economy has evolved in ways once deemed highly unlikely, if not unthinkable. It is a phenomenon that continues today and will intensify in the period ahead. The global financial crisis that shook virtually every country, government, and household in the world in 2008–09 gave way to a frustrating “new normal” of low growth, rising inequality, political dysfunction, and, in some cases, social tensions—all despite massive policy interventions on the part of central banks and transformational technological innovations.Now this new normal is getting increasingly exhausted. For those caring to look, signs of stress are multiplying—so much so that the path the global economy is on is likely to end soon, and potentially quite suddenly.
As we approach this historic inflection point, unthinkables will become more common and insecurities will rise, especially as it becomes clearer that, rather than transition smoothly and automatically, the current path could give way to one of two very different new roads. The first promises higher inclusive growth and genuine financial stability. But, in stark contrast, the second would see us mired in even lower growth, periodic recessions, and the return of financial instability."
His analysis that central banks have done what they can and now must "hand off" to the fiscal authorities is important from such a prominent voice in finance
Mohamed El Erian in an interview with LinkedIn makes the point that high incomes lead to high savings leading to lower demand in the overall economy resulting from less money circulation. In economic speak, their propensity to spend declines after a certain level and goes unspent into the economy. Because there is a, relatively, set amount of money in the system failure to spend reduces demand and overall output.
El Erian writes:
"In the last few years, the global economy has evolved in ways once deemed highly unlikely, if not unthinkable. It is a phenomenon that continues today and will intensify in the period ahead. The global financial crisis that shook virtually every country, government, and household in the world in 2008–09 gave way to a frustrating “new normal” of low growth, rising inequality, political dysfunction, and, in some cases, social tensions—all despite massive policy interventions on the part of central banks and transformational technological innovations.Now this new normal is getting increasingly exhausted. For those caring to look, signs of stress are multiplying—so much so that the path the global economy is on is likely to end soon, and potentially quite suddenly.
As we approach this historic inflection point, unthinkables will become more common and insecurities will rise, especially as it becomes clearer that, rather than transition smoothly and automatically, the current path could give way to one of two very different new roads. The first promises higher inclusive growth and genuine financial stability. But, in stark contrast, the second would see us mired in even lower growth, periodic recessions, and the return of financial instability."
His analysis that central banks have done what they can and now must "hand off" to the fiscal authorities is important from such a prominent voice in finance
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