The issue of Economic Inequality (especially with respect to poverty) has never been a main focus of traditional economic theory or policy-making. Somehow that issue never fit neatly with the concepts of labor productivity, utility analysis or the IS-LM curve. Yet the concept of economic inequality is perhaps the most germane towards a deeper understanding of promoting Aggregate Demand and growth within an economy. As Keynesian economics explains increasing the income of the lower strata of society will increase overall Consumption and Aggregate Demand through a higher marginal propensity to consume among those strata, and the impact of the multiplier effect. Yet, despite the empirical confirmation of the validity of this theory as evidenced by post-war Europe’s rise in the 1950s and 60s the United States is still slow to embrace the policy of stimulating economic growth through reducing inequality.

If we break down the income numbers by racial lines we see that White-dominated households earned an average of $60,300 per year in 2014, compared with $35,400 for Blacks and $42,500 for Hispanics. That meant that Blacks earned less than 60% of the income that Whites earned in America, while Hispanics earned a shade over 70%. To put this into context, Black Americans comprise about 13% of the population but earn less than 9% of overall income. This has implications for many things beginning with a lower ability to afford quality housing, attend quality schools, promote healthy food choices, all the way to reducing their likelihood of saving for retirement. The ripple effect of this reduced income level therefore permeates through all segments of our society.

It also means that the incidence of poverty is highest in these racial and ethnic groups. In 2014 the poverty rate for non-Hispanic Whites was 10.1 percent, compared with 26.2 percent for Blacks and 23.6 percent for Hispanics.

Understandably, owing to the higher incidence of poverty and inequality among those racial groups their economic impact is smaller within our economy. However, finding ways to increase the incomes of Blacks and Hispanics will significantly stimulate Aggregate Demand and growth within our economy. For e.g. raising the household income of Blacks to match those of Hispanics in the U.S. will initially expand the economy by 1.7%. While that it a modest expansion, when the multiplier effect fully kicks in it should see the long-term growth trajectory of the economy increase measurably by over 5% per year. Likewise, if both racial groups see their incomes increase to three-quarter of that of Whites the short-term impact on the economy will be a 3% per year additional expansion with the long-term multiplier effect on the growth rate increasing by nearly 7% annually.  Those are gaudy numbers indeed and not ones to be scoffed at. Alleviating poverty and promoting economic equality may sound like virtuous policy aims but they may also provide a sound platform for long-term growth and development within the U.S. economy.

Keith Thompson is a Senior Economist in Transfer Pricing with an agency within the US Department of the Treasury, and an adjunct Economics professor with Ramapo College of New Jersey.