Debt and Inequality Go Together: Rising Debt Is the Cause of Rising Inequality

As a German economist once pointed out, while any individual business can increase its profits (and thus executive pay, if shareholders are powerless) by paying its workers less, businesses in general must turn around and sell things to those same workers to make money. As inequality rises what they gain in the labor market they lose in the consumer market, as they must cut prices to make sales or see their sales fall. The same may be said of trade – country A can only sell goods and services to country B if country B has the money to pay for it, from selling to country A or someone else. For these reasons, debt and inequality go together. Debt allows businesses to pay workers less and yet sell them more, and countries with trade surpluses to sell to countries with trade deficits. And so it has been in the United States.

The Federal Reserve released the latest data on U.S. debts, for 2013, last week. Charts, a spreadsheet and related commentary may be found on “Saying the Unsaid in New York.”