Rising Inequality in an Era of Austerity: The Case of the US

US inequality has rapidly increased since the early 1970s. For advanced economies, inequality is linked to stronger incentives that enhance growth, education, innovation and entrepreneurship. However, the rise in US inequality is concentrated in the top 1%. Hence it is increasingly possible that economic rewards may be too uncertain to promote effort, suggesting the US has crossed a tipping point in which inequality reduces growth. Other costs include more social and political instability, making inequality the next potential “crisis” facing America. This study first examines trends in inequality and then reviews arguments that suggest that it is both good and bad for growth in America's cities. We then provide evidence that there has been a reversal in the effects of inequality after 2000 with it now being associated with less income and job growth in US metropolitan areas. We conclude by arguing that no general solution is possible without significant political reforms that equalize political influence.