Income inequality and the bottom line

Economists have long known that cutting taxes for so-called “job creators” has done little historically to improve the economy. Why? Ask your local retailer what would more prompt him or her to hire more employees – a tax break in April or more customers every month of the year. Economic growth comes from everyday Americans having money to buy products, which causes companies small and big to hire and invest.

But America’s middle class has been shrinking, and now businesses are feeling the consequences. As the New York Times reported Monday, companies that serve the middle class are struggling and cutting jobs as their customer base dwindles. It’s a cycle that will continue so long as the income gap continues to widen. That’s not good for anyone.

Right now, most Americans are being left out of a recovery that’s being driven primarily by the affluent. A study from economists at Washington University in St. Louis showed that in 2012, the top 5 percent of earners were responsible for 38 percent of domestic consumption. That’s up from 28 percent in 1995.

For the other 95 percent, spending has stalled, and companies that need the middle and lower classes to open their wallets are suffering. That includes department stores Sears and J.C. Penney, which are closing stores and cutting jobs, the Times reports. Restaurant giant Darden has seen traffic at casual dining properties Red Lobster and Olive Garden drop in every quarter but one since 2005.

Businesses that can are trying to shift their focus toward richer customers, but with most Americans not participating in the recovery, economic growth is at best volatile and probably not sustainable in the long run. Said Washington University economist Steven Fazzari: “It’s going to be hard to maintain strong economic growth with such a large proportion of the population falling behind.”

But that’s what continues to happen, in part because of Republican policies that hurt the struggling or long-term poor. In North Carolina, legislators sharply cut unemployment benefits and eliminated the earned income tax credit for low-income families. Gov. Pat McCrory now claims those policies are helping a “Carolina Comeback,” but the lower unemployment rate he points to is a statistical illusion. The rate has gone down because more people are giving up and dropping out of the workforce.

Those North Carolinians are among the increasing number of Americans who feel as if they have less. A Pew poll last month showed that 57 percent of Americans feel that their incomes are not keeping up with the cost of living, and 40 percent feel that they are lower-middle or lower class. Six years ago, that number was just 25 percent.

President Obama spoke of these Americans last week in his State of the Union address. “Inequality has deepened,” he said, while calling for raising the minimum wage and extending long-term unemployment benefits. But even if those prescriptions aren’t long-term answers, helping those Americans is not only about providing opportunity to the vulnerable. It’s about making more of them customers, which helps business, which helps us all.