Inequality on this scale is bad for many reasons but it is also bad for the economy. The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.
This underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. But they have now run out of such coping mechanisms. As I've noted elsewhere, the first coping mechanism was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent. But there’s a limit to how many mothers can maintain paying jobs.
So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.
But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third coping mechanism. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. And now, with the bursting of the housing bubble, the piggy banks are closing. Americans are reaching the end of their ability to borrow and lenders have reached the end of their capacity to lend. Credit-card debt, meanwhile, has reached dangerous proportions. Banks are now pulling back.
As a result, typical Americans have run out of coping mechanisms to keep up their standard of living. That means there's not enough purhasing power in the economy to buy all the goods and services it's producing. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.
from Robert Reich