On September 17, the Subcommittee on Economic Policy of the Senate Banking, Housing, and Urban Affairs Committee held a hearing about the economic impacts of rising inequality. Senator Jeff Merkley (D-OR) is chair of the Subcommittee.
Adam Hersh, senior economist at the Center for American Progress, testified that research shows that lower levels of economic inequality result in safer, more engaged, less polarized societies with more stable financial systems. Mr. Hersh criticized the business practice of offshoring, asserting that it exacerbates inequality and constrains domestic economic growth. Offshoring is when American companies strategically move certain operations to foreign countries with lower costs.
Claudia Viek, CEO of the California Association for Micro Enterprise Opportunity, recommended promoting entrepreneurship. Within and across demographic groups, business owners are wealthier than non-business owners. Ms. Viek recommended increasing government support for programs that aid in creating small businesses in order to help entrepreneurs improve their financial situation. In the past three years, however, there has been a 40% reduction in funding for such programs.
Amir Sufi, a finance professor at the University of Chicago, explained that most debt contracts force borrowers to bear the brunt of an economic downturn. Given that 85% of financial assets are owned by households in the top 20% of the wealth distribution, the middle and working classes will not fare well in an economic downturn. Mr. Sufi also expressed concern about the recent expansion of credit to lower income households without a corresponding increase in their income, calling it a “recipe for disaster.”
Heather McGhee, president of Demos, noted that “economic inequality and political inequality are self-reinforcing.” There are 51 million eligible voters, mostly low income, who are not currently registered to vote. Even if middle and working class voters are registered, their voice in campaigns is now effectively drowned out by ultra-wealthy donors. Ms. McGhee also stressed the importance of making college affordable to everybody who seeks to further their education. Nearly half of low-wage workers have some college education, but many have dropped out of college, primarily due to financial constraints.
Senator Elizabeth Warren (D-MA) cited a study by William Lazonick, an economics professor at the University of Massachusetts, Lowell, who found that the average proportion of corporate earnings going to shareholders has increased from less than 50% in the 1980s to 91% between 2003 and 2012. After this disbursement, little is left to share with workers. Mr. Sufi cautioned that this increasing focus on short-term earnings in capital markets prevents companies from reinvesting in workers and equipment in order to boost productivity, which can have a detrimental effect on long-term economic growth.
A webcast of the hearing and written witness testimony is at http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=0570dc0a-a60e-4014-9bc1-16ff62f15661