Is there a correlation between income disparity and growth?

The news is full of data these days about how over the last thirty years the gap between the wealthiest Americans and the working folk in America has exploded.   The rich have gotten way richer, while the middle class has seen no growth in real income.

No one outside of the partisans on each side of the political spectrum seem quite sure how to treat this fact.  The partisans on the right talk about class warfare, and that the rich got that way because they earned it.  The partisans on the left say we are all in this together, that this simple fact in itself justifies....something...no one seems quite sure.  Higher taxes on rich people maybe?

I find some data from a couple different fields raising a question I believe should be the focus of consideration of the increased disparity in income across our society.

First, I know that psychological studies have found that generally what makes rich people happy is not how much they have, it is how much they have relative to other people.  It is an ego boost, a way of proving they are special.  It is not, I suspect, that the super rich are competing with the middle class, they are competing with one another, with other people that judge self worth in monetary terms.  I am not being judgmental here - I draw no conclusions about whether building your self image around how much money you make is good or bad.  We all need to have ways to make ourselves feel special.  I am just noting this is what psychology suggests is what motivates people to keep accumulating wealth far beyond what they need to live comfortably and securely.

Second, one of the historical facts frequently cited to prove that we have in fact developed into a much more stratified society economically is that the gap between the middle class and the wealthy has not been this large since the 1930's.

This intrigues me because our current situation tracks so closely to the situation in the 1930's.   In the decade leading up to the 1930's Republican ideology that focuses on turning individual initiative loose from the constraints of government was very popular, Republicans controlled both houses of Congress and the Presidency from 1922 to 1932.  During that period we went through an enormous, largely unregulated boom that caused the gap between the wealthy and the middle class.  In 1929 the stock market crashed and we began sinking into the great depression that, among other things, aggravated the income gap.  The country turned more toward the Democrats view that a society that used government to control individual excesses in 1933.  For the next half a century we went through a prolonged period of growth that spread benefits across the income spectrum.  The gap between the wealthy and the middle class was a fraction of what it is today.  In 1980 Ronald Reagan invigorated the Republican ideological counterattack  and the gap between the rich and the middle class began to grow again during his administration.  Public sentiment seemed to swing toward Republicans and they gradually began regaining control of the nations agenda, culminating with the election of George W. Bush in 2000 along with Republican majorities in both houses of Congress.  For 6 years Republicans controlled both houses of Congress and the Presidency, and pursued policy's reflecting their ideological belief that individuals needed to be released from the constraints imposed by government.  The current economic collapse was beginning as the Republicans lost their total control over government, and the current gap between the incomes of the rich and the middle class seems to be entirely a product of the policies pushed by Republicans to free individuals from the constraints of government.

So here is where all this leads me?  It leads me to wonder if there any research out there correlating economic growth with the degree of income disparity in the countries population.

Do Country's that have relatively small disparities in income between the wealthy and the middle class grow faster or slower than countries that have a large disparity in income between rich and middle class?

Is there an optimum level of disparity where growth is maximized?

Would the wealthy care if it became apparent the country could grow faster and be stronger, if they shared more of the wealth with the middle class?   This is a particularly compelling question now that the wealthiest folks are now global.  The really wealthy in the US didn't seem to have a problem with shipping jobs to other countries and closing down their operations in this country.  Of course one can argue they were compelled by the markets.  But in terms of their personal wealth, will they see trying to help their country remain a dominant economic power as a distraction from their effort to climb the global wealth ladder?

I'm betting, given the fact this income disparity issue has been an issue for awhile, that if there isn't any data out there yet, there will be soon.  If anyone runs into it please share it.

Postscript:  there evidently is some data - as explained in an email from my cousins:

In his book, “The Darwin Economy,” Robert H. Frank of Cornell University cites a study showing that among 65 industrial nations, the more unequal ones experience slower growth on average. Likewise, individual countries grow more rapidly in periods when incomes are more equal, and slow down when incomes are skewed.

Globalization - the long term picture

Historically economy's have usually been local, and locals have fought to keep competition from outside the local area even as they sometimes are seeking to sell their goods and services to others outside their area.  Economists believe that knocking down all those local barriers will make everyone better off.

Globalization is the buzz word we use for the process of knocking down local barriers to commerce.  Globalization is one of those things that is great in economic theory but presents horrendously thorny problems when we try to find ways to get there.

The basic conundrum is as long as big parts of the worlds workers are climbing out of abject poverty, they are happy with a life style workers in developed economies find unacceptable.  But the process pursued in the last 150 years that has brought workers in less mature economies up out of poverty  has involved developed world companies moving jobs to less developed countries.  Sometimes this is driven only by the desire to make more profits, but often it is forced by realities of the market place.  If a company doesn't do it some one else will and the companies products will then be overpriced.

The result has been progress toward globalization has waxed and waned.   There is lots of enthusiasm for awhile, but eventually the process causes job losses and economic slowdowns which kill enthusiasm, particularly in democratic states, for globalization.

There is lots of irony involved in the Globalization process.   American consumers have made Wal-Mart one of the worlds most successful retailers because of its low prices, but Wal-Mart - and other similar companies - have dropped prices by producing their goods outside the United States and gradually undermined the economic viability of many of the industries that employed those same consumers.

So the fundamental problem can be posed - how can you deal with the job losses in developed countries that are inherent in the process without condeming the undeveloped world to decades of further poverty.   How do you replace the jobs in western countries that are migrating to less developed economy's?

Supporters of globalization (mainly either rich folks not threatened with job loss or idealistic economists) often argue that the free market can replace those lost jobs with the proper incentives.  I'm dubious - I think the free market can dream up some new products or services that can provide jobs for workers in developed countries, but I suspect that won't happen nearly as fast as job losses will occur.  Our world is already full of products and services many of us wouldn't buy, finding really new products that appeal to masses of people is really hard.

One possible way to alleviate the gap between job losses and creation of new private sector jobs is to use Government jobs.  Hire people, particularly young people and older folks, to do the things that contribute to a richer life but that the private sector can't do effectively (or profitably).  All my life I have marveled at the beautiful and functional infrastructure built by the WPA during the great depression.  It seems to me that offers a path to offset the negatives of globalization.

However the Civil Service laws that have built up over the last century create a problem with using Government.  If the primary purpose of the government program is to create jobs, direct government hiring is handicapped by the protections the law gives to Government workers.  Government jobs seeking to stimulate the economy should be focused on giving people a lifeline and experience.  They should pay less than the private sector, and provide fewer long term benefits, so people will be motivated to move out of the government job and into the private sector as soon as possible.