December 19, 2012 / 12:05 PM / 5 years ago

The Unequal State of America: Does income inequality matter? And how?

(Reuters) - The moral arguments against income inequality are familiar. Liberal commentators have long believed that a highly unequal society is not a just society. But what, if any, are the economic consequences of inequality?

Former Bain Capital partner Edward Conard argued in a best-selling book this fall that inequality was, in fact, good for economic growth. In “Unintended Consequences: Everything You’ve Been Told about the Economy is Wrong,” Conard said that concentrating wealth in a skilled investor class helps fuel innovation. Liberal scholars vehemently disagree.

David A. Moss, a historian at Harvard Business School, said that periods of high income inequality correlate with financial crashes, citing the 1929 stock market crash and the current recession as examples. A 2011 International Monetary Fund study found that inequality produced economic volatility in several countries. In general, more-equal societies had longer periods of sustained economic growth than unequal ones, it concluded.

In this year’s U.S. presidential campaign, President Barack Obama and other Democrats embraced those views, arguing that rising middle-class incomes would fuel economic growth. Republican reaction was split. Conservative scholars and politicians questioned whether the growth in inequality was, in fact, as great as liberal academics claimed. They said that while income growth may have slowed for most Americans, their consumption rates - and thus their well-being - have risen.

Republican candidate Mitt Romney said inequality was something that should be addressed “in quiet rooms and discussions about tax policy,” and accused Obama of exaggerating the problem for political gain. Not all Republican leaders agree, though.

Mitch Daniels, governor of Indiana and a possible 2016 presidential candidate, said rising income inequality can be destructive if it corrodes Americans’ belief in the possibility of upward mobility. In an interview, Daniels warned that the country will lose its economic dynamism if people decide to “try less hard” because they think the system is skewed toward the rich.

“I think the lack of upward mobility - or even the perceived lack of it - undermines economic vitality,” Daniels said, “and incidentally it undermines the sense of fairness and unity in society that is necessary to keep the social fabric together.”

Reporting By David Rohde; Edited by Michael Williams

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