The Cost of Inequality – How Uneven Wealth Distribution Impacts Growth

Santiago Bel
March 8, 2025

Income inequality isn’t a new issue, but it’s becoming one of the defining economic issues of the 21st century. Inequality refers to the unequal distribution of wealth and income within a society. The issue isn’t just a moral or political one, but one deeply economic. If too much wealth is concentrated in the hands of a few, then growth will slow, opportunity will shrink, and social stability will weaken. For the past forty years, the U.S. has been a case study of how this imbalance happens and what happens when governments, whether deliberately or otherwise, create systems that advantages capital over labor.

The U.S. economy has skyrocketed in the past 30 years. While GDP and corporate profit soared, not everyone benefited from it, however. During the presidency of Ronald Reagan, supply-side economic philosophy, often referred to as genesisomics, was the dominant philosophy. The idea was simple. Cuts taxes for nations or high earners. Reduces control and let us wealth trickle down to others. Thus, while promising demeanour has sponsored investments and entrepreneurship one must shrink the income gap. While corporate profits, stock prices, and executive pay soared, wages for the average worker remained stagnant. The nation’s income began to be pooled by the top one per cent of earners.

Under Bill Clinton the 1990s marked technological change and globalization. Through treaties like NAFTA, Clinton’s administration encouraged free trade, and while these treaties opened global markets, they also resulted in factory closures and job losses in some parts of the US. As a result of the so-called “China shock”—massive imports of inexpensive products that displaced American employees—manufacturing towns across the Heartland have been hollowed out. Regional differences were thrown into sharper relief: booming coastal cities such as San Francisco and New York got richer, while much of the Rust Belt fell behind. Clinton’s budget surpluses may have satisfied Wall Street but Main Street was starting to fall apart.

After the 2008 financial crisis, the divide deepened. When he took office, the economy was going through a very rough phase. The Obama administration responded to this pressure with a large stimulus and with TARP, the huge bank bailout program. These measures avoided a complete collapse, but the subsequent recovery was uneven. Values of stocks, bonds and homes recovered sharply but wage growth was lacklustre for years. Due to the Federal Reserve’s low interest policy, the value of financial assets increased. This helped the rich as they owned most of the financial assets. For ordinary families, the recovery felt distant. Few have been able to regain the stability the Great Recession robbed of them.

Donald Trump's presidency took these trends somewhere else, but continued them. In 2017, a tax reform was introduced which reduced corporate tax but still gave a small relief to middle-class earners. However, yet again most of the benefits went to the top. At the same time, his trade conflict with China raised costs on items such as steel and electronics, which ended up hurting lower-income customers who spend a bigger share of their income on those items. Under Trump, the stock market boomed but this was another time when financial wealth outpaced real wage growth for most Americans.

With Joe Biden, inequality has come back into the spotlight again but not in the same way. His Inflation Reduction Act and infrastructure investments will help build long-term economic capacity: clean energy, broadband, transportation, while supporting working-class jobs. The administration’s focus on labor unions and domestic manufacturing represents a break from decades of pure market liberalism. The top 10% of Americans own almost 70% of the wealth of the country anyway, the task is difficult. Although there isn’t a lot of unemployment going on, younger generations are unable to afford houses. Moreover, debt on student, credit card and mortgage is becoming bigger and bigger, faster than the rise of wages.

Nowadays, the inequality is not a social injustice but something which hampers the efficiency of the economy. As wealth accumulates at the top, consumer demand weakens. That is because the wealthy save more and spend less as a proportion of their income. On the other hand, households with low and middle-income levels spend whatever they earn. When the stock price and profits are not in sync, growth can slow down. The system can increase financial instability as households can borrow to maintain their standard of living. So, a debt bubble forms. The 2008 crisis was such a borrow.

Inequality also damages productivity in indirect but lasting ways. Make it clear that education, housing and health are killing people outlook for the future. This results in a reduction of professional employees, followed by less creativity and a diminished group of individuals with moderate income. America today is just experiencing exactly the same problem which was faced by one of the richest nations in history. Fifty years ago, it was easier to fulfill the American Dream as compared to today’s generations.

Globally, inequality mirrors this story. In numerous developing countries, the elite controls a huge chunk of the economy while public investment suffers. Inequality is not merely Latin America’s curse. Until recently, China was hailed as an extraordinary success story that lifted hundreds of millions out of poverty. Yet today, a widening urban-rural gap is also taking shape there. Economists caution that extreme inequality often leads to political instability as people become frustrated and demand reform or turn to populist leaders who promise to fix it.

So what can governments actually do? Solutions exist, but all come with trade-offs. Hiking taxes on the rich and stopping loopholes can help fund education and health-care, but they often trigger a backlash. We can also redistribute opportunity without choking off growth by expanding worker ownership of companies, investing in training, and enforcing antitrust laws. Some economists argue that a stronger safety net—universal childcare, healthcare and education—would create more equal starting points. Some advocate for policies that increase the pie instead of merely sharing it; including grants for innovation, affordable housing and higher minimum wages.

The real challenge is not recognizing inequality, but to act against it before the system breaks down. Over the past 40 years, giving free reign to markets has generated great wealth-but fragile societies. A healthy economy needs both dynamism and fairness. Biden may not fix all of America’s issues through industrial policy but, at least, he seems to realize that growth is not growth if it leaves most behind.