Unbound: Releasing Inequality’s Grip on Our Economy

Abstract

There is a transformation now underway in economics that is thoroughly upending the conventional wisdom about how our nation can deliver strong, stable, and broadly shared economic growth. A new generation of scholars, informed by new data and sources of empirical evidence, is challenging long-held assumptions about how the economy works and the extent to which those workings can be understood in isolation from the larger dynamics of the rest of society. Real-world observations are undermining the claim that markets left to their own devices reliably deliver socially beneficial outcomes. All this is paving the way for a major shift. The new framework starts from the understanding—grounded in the evidence—of the ways that inequality obstructs, subverts, and distorts economic growth. While Adam Smith’s famous invisible hand pushes the economy toward broadly beneficial outcomes, economic inequality acts as bind, thwarting the idealized market processes as it transforms into social and political power. A rising tide cannot lift all boats when some cannot even get launched and others pushed off course and deprived of navigation tools, founder on the rocks. Inequality constricts economic growth. This framework exposes dynamics more complex than the conventional economic wisdom of the past can explain. While it is tempting to embrace the simple tale that a rising tide lifts all boats, we need to make sense of a large body of research literature, much of which has focused not directly on the question of how inequality affects economic growth but rather on how inequality affects mechanisms that in turn drive investment and productivity. The reasons that economic benefits are not flowing to families may be disparate, but there are many common themes—which, once fully traced, can reveal new patterns to guide better economic thinking and policymaking.