Here's a puzzle that challenges conventional wisdom: shouldn't it be good for the economy when some people get very wealthy? After all, wealth creates investment, investment creates jobs, and jobs create prosperity. That's the story we often hear.

But economists are increasingly finding the opposite. When too much income flows to the top, the whole economic engine starts sputtering. It's not about fairness or politics—it's about how money actually moves through an economy. Understanding this mechanism helps explain why some prosperous nations struggle with sluggish growth while others with more balanced income distributions thrive.

Imagine you earn $50,000 a year. You probably spend most of it—rent, groceries, car payments, the occasional dinner out. Now imagine someone earning $50 million. They'll buy nice things, sure, but they physically cannot spend money at the same rate relative to their income. A billionaire can only eat so many meals, drive so many cars, or live in so many houses.

This creates what economists call a demand deficit. When income concentrates at the top, a larger share of the nation's money sits in investment accounts rather than flowing through cash registers. The wealthy save around 40% of their income; middle-income households save closer to 5%. Shift $100 from a middle-class family to a wealthy one, and roughly $35 of spending disappears from the economy.

Think of the economy as a circulatory system. Money needs to keep moving—from wages to purchases to business revenue to more wages. When too much pools at the top, the circulation slows. Businesses see fewer customers, hire fewer workers, and the slowdown compounds. This is why John Maynard Keynes emphasized that aggregate demand—total spending in the economy—drives growth more than accumulation at the top.

Takeaway

Money in motion creates economic activity; money sitting still doesn't. When income shifts toward people who save most of it, the economy loses the spending that creates jobs and growth.

Every year, children with enormous potential are born into families that can't afford quality childcare, nutritious food, or homes in neighborhoods with good schools. These aren't just personal tragedies—they're economic losses. That future engineer, entrepreneur, or doctor never emerges because the investments required to develop their talents never happened.

Economists call this human capital waste. Studies consistently show that children from low-income families score just as high on early cognitive tests as wealthy peers, but the gap widens dramatically by school age. It's not ability that differs—it's opportunity. The economy loses their potential contributions forever. One estimate suggests that child poverty costs the U.S. economy roughly $1 trillion annually in reduced productivity and increased social costs.

Consider what happens when talent can't find its footing. A society with extreme inequality essentially runs a lottery where most tickets are blank. Innovation suffers because fewer minds are developed. Entrepreneurship lags because starting a business requires capital and safety nets that poor families lack. The economy doesn't just lose individual contributions—it loses the compounding effects of those contributions over decades.

Takeaway

Talent is distributed randomly across income levels, but opportunity isn't. When poverty blocks potential, the entire economy loses the innovations, businesses, and productivity those people would have created.

Here's where economics meets political reality. When wealth concentrates dramatically, so does political influence. Campaign contributions, lobbying power, and media ownership tend to follow money. This creates a troubling feedback loop: policies increasingly favor those who already have the most, which increases concentration further.

The economic problem isn't about ideology—it's about what gets prioritized. Tax cuts for capital gains benefit asset owners. Deregulation often serves established players. Infrastructure, education, and public health—investments that broadly boost productivity—get squeezed. Research shows that policy outcomes in highly unequal democracies correlate strongly with wealthy preferences, while middle and lower-income preferences show almost no correlation with actual policy.

This matters for growth because broad-based prosperity requires broad-based investment. An economy needs educated workers, functioning infrastructure, and healthy consumers. When political systems optimize for wealth preservation rather than wealth creation, the foundations of growth erode. Countries with more equal income distributions tend to sustain growth longer, partly because their political systems remain more responsive to investments that benefit everyone.

Takeaway

Concentrated wealth tends to produce concentrated political power, which often redirects policy away from the broad investments in education, infrastructure, and health that drive sustained economic growth.

Inequality isn't just a social issue—it's an economic drag that operates through multiple channels. Less spending circulating, less talent developed, and less investment in shared foundations all compound to slow growth over time.

Understanding these mechanisms changes how we evaluate economic policy. The question isn't simply whether growth is happening, but whether it's building an economy that can sustain itself. Broad prosperity isn't just fairer—it's more economically durable.