Income Inequality and Economic Growth?

As we are still recovering from the recession, the issue of economic growth has become even more prominent. The rate of economic growth plays an important role in determining how fast our economy will recover and advance. At the same time, the increase in the inequality of economic outcomes has become one of the most important economic challenges in the U.S. The problem of income inequality has been a serious problem of the modern U.S. economy. Some argue that a certain level of income inequality is necessary for economic growth. However, others argue that inequality is bad for the economic growth as a whole and serves as a major reason for why recovery from the recession is so slow. Economists Barry Z. Cynamom and Steven M. Fazzari argue that “stagnant income for the bottom 95% of wage earners makes it impossible for them to consume as they did before the downturn.” Since consumption is about 70% of the U.S. economy, this is a serious issue. Their paper argues that the top 5% are back to normal but everyone else is still straggling along. Thus, the total consumption level is still low. They say the level is “far below what they had maintained for two decades before the recession,” which is a serious problem for the economy. Would the U.S. economy work if only the top 5 % are doing better?

Source: http://www.washingtonpost.com/business/economy/income-inequality-hurts-economic-growth-researchers-say/2014/01/24/cb6e02a0-83b0-11e3-9dd4-e7278db80d86_story.html https://www.nytimes.com/roomfordebate/2012/10/18/shrink-inequality-to-grow-the-economy