Public Assets Institute > Blog > A Bigger Pie Doesn’t Mean a Bigger Slice for All

A Bigger Pie Doesn’t Mean a Bigger Slice for All

One of the justifications for lowering taxes on the rich for the last 30 years has been that their increased wealth would trickle down to the rest of us. We needn’t complain that some are getting bigger slices of pie than others, we’ve been told, because the pie is getting bigger, and we’re all getting a little more.

Now a new study by the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst challenges the premise that we shouldn’t worry about the growing income inequality gap. (A summary version of the report is available here.) The analysis, by PERI research economist Jeffrey Thompson and Elias Leight, a tax analyst with the Congressional Budget Office, found that when the rich get richer, the rest of us really do get poorer.

“We find that the income of low and middle-income households falls as the disparity in incomes rises,” the authors wrote. “These findings are consistent even with research showing higher inequality leads to greater overall economic growth.”

As the authors explain, previous studies have reached different conclusions about whether income inequality helps the economy overall. On the theory that the gap serves as an incentive to induce people to work harder to try to get ahead, some research has shown that the economy grows faster in times of growing inequality. Other studies, however, have concluded that the rate of economic growth slows as the disparity widens between rich and poor.

What the latest study reveals is that when the rich get richer, incomes for low- and moderate-income household go down—even though the overall economy may be expanding.

We can find evidence in Vermont to support the study’s conclusion. According to Census data, median household income in Vermont—half of the households make more than the median and half make less—rose just 2.1 percent between 1989 and 2009 after adjusting for inflation. But while those in the middle did not see any real income gains during those 20 years, a greater and greater share of income has gone to those at the top for the last four decades. Analysis by Mark Frank of Sam Houston State University shows that the top 1 percent of Vermonters received 6.6 percent of income in 1970, and by 2005 the share received by the top 1 percent had almost tripled, to 19 percent.

This widening income gap didn’t just happen. It’s the result of tax, spending, and regulatory policies this country has adopted for the last 30 years or so. The bad news is that these policies didn’t produce the broad prosperity that was promised. The good news is that we don’t have to stick with these policies; they can be changed until we get it right.

Posted by Jack Hoffman on July 27, 2011 at 10:48 am

3 Responses to “A Bigger Pie Doesn’t Mean a Bigger Slice for All”

  1. RALPH W HOWE says:

    The US has conducted a valid field test of the hypothesis that when the rich are allowed to get richer, the whole economy and those in lower brackets also benefit. That test went from January 2001 to January 2009. The hypothesis failed. It is rather unfortunate that so many people who are not rich continue to support this hypothesis even as it hurts them and most every one else–worse still that they are in political power in so many places. Further evidence of the falseness of this viewpoint can be seen in the application of neo-liberal policies in third world countries by the World Bank and IMF over the past 30 years. It didn’t work there and it won’t work here.
    Also, in an international economy, the investments of the rich will go toward the highest profits, which will be where labor costs and environmental remediation costs are lowest–that would be outside the US, so even if the hypothesis were true, in current market conditions, it would not benefit US workers, but those in the lowest wage countries.
    Too bad that reason and truth are so irrelevant to political discourse.

  2. […] share of the economic pie, more than 70,000 Vermonters lived at or below the poverty level in 2010.11 Vermont’s poverty rate had been steadily dropping over the past several decades, but it was up […]

  3. […] share of the economic pie, more than 70,000 Vermonters lived at or below the poverty level in 2010.11 Vermont’s poverty rate had been steadily dropping over the past several decades, but it was up […]