Behind a Quest for Better Answers on Inequality and Economic Growth

The other night, during the Republican presidential debate, Rand Paul was asked whether it mattered that “the gap between the rich and everyone else is widening?”

Paul responded that it “absolutely mattered,” going on to charge that inequality was worse in cities led by Democratic mayors and that the Federal Reserve is a key culprit here.

Say what?

For all the talk of inequality these days, there remains enormous confusion and controversy around what’s driving growing gaps in income and wealth or what to do about this. Inequality has been rising for 40 years, but scholars have been slow to get a handle on this complex phenomenon. And Rand Paul is not the only politician with wacky ideas about an economic divide that’s wider now than at any time since the 1920s.

At Inside Philanthropy, we’ve lately reported on how some foundations are keen to plug gaps in knowledge about inequality. Earlier this year, I wrote about the Russell Sage Foundation’s deep dig into inequality, which has included funding myriad studies on its economic, political, and social dimensions. We’ve also reported on how the William T. Grant Foundation is specifically funding research on children and inequality.

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But these two funders aren’t the only institutions making grants to scholars delving into inequality. A new player in this space is the Washington Center for Equitable Growth, which set up shop in late 2013 with funding from the Sandler Foundation and has a grantmaking arm that started giving away funds last year. The center has now given out a slew of grants to scholars—dispensing the kind of research money that isn’t easy to come by, especially for younger researchers.

John Podesta, who founded the Center for American Progress—also with Sandler funding—helped create the Washington Center, and its executive director is Heather Boushey, an economist who previously worked at CAP, as well as other think tanks. The center’s high-powered steering committee includes not just Podesta, but Alan Blinder, Robert Solow, Raj Chetty, and Emmanuel Saez, an expert on inequality who leads a sister research organization, the Center for Equitable Growth at the University of California, Berkeley (which is also funded by the Sandler Foundation, among other donors.)

The Washington Center’s research agenda, Boushey explained to me, is laser-focused on “whether and how inequality affects economic growth and stability.” For all the work done on inequality, including the many studies funded by RSF, Boushey says that “there’s a narrow body of research on inequality and growth… In terms of the big picture, there are a lot of open questions.”

One of the most influential scholarly works on that larger picture remains a 1975 book by Arthur M. Okun, Equality and Efficiency: The Big Tradeoff, which—as the title suggests—postulates an inherent tension between a dynamic, growing economy and efforts to reduce inequality. Okun’s volume was published at an anxious moment in the U.S., when growth was stagnating amid an expansion of government programs designed to fight poverty. For decades since, many policy leaders, particularly conservatives, have argued that there’s an inherent tradeoff between growth and equality. In fact, it’s fair to say that some Republican politician or right-wing policy wonk makes this point nearly every day of the week.

Yet in just the past few years, a new narrative has emerged to challenge the trade-off argument—namely, that inequality is actually bad for growth because it’s hollowing out the American middle class, a group which once captured a larger share of the nation’s economic output and whose spending power is a key driver of strong consumer demand. As well, critics of inequality have argued that huge financial rewards for financiers and CEOs have produced rash risk taking, leading to crashes that derail growth.

President Obama has been among those leaders drawing attention to this thesis, and calling for a new “middle-out” economics that aims to boost growth by curbing inequality and ensuring that ordinary Americans capture a greater slice of the economic pie.

It’s a compelling narrative, but in truth, there are many unanswered questions about the exact relationship between inequality, growth, and stability. The Washington Center was set up to answer those questions, Boushey says, and “build out the base of academic research that explores middle-out economics.” The goal is to “integrate this work into the policy process and knit it into a larger picture of the economy.”

The center’s focus on connecting scholarly research to policy sets it apart from the Russell Sage Foundation, which has much deeper pockets and gives out much more grant money—but operates out of New York offices and doesn’t hustle to get the work it funds into the hands of people with power.

So what sort of research is winning grant money from the Washington Center? This year’s grants went to scholars exploring a number of areas, like how economic inequality affects the development of human capital, a key ingredient for growth; how the distribution of economic resources affects how households consume and save; and how inequality affects governance and especially those political and social institutions that contribute to “economic well-being and, ultimately, economic growth.” (You can see the center’s grantmaking agenda here, along with a list of grantees from 2014 and 2015.)

Grant amounts have generally ranged from $15,000 to $75,000, which may not sound like big money, but actually goes a long way for academics looking to buy out course time or for grad students struggling to pay for rice and beans. In fact, the center has made a point of supporting younger scholars, and this year’s grantees included a bunch of doctoral students who got $15,000 each, which is nice money for anyone working on a Ph.D.

Boushey says that the center is “obsessed with funding young scholars” in order to “build a deeper bench of people who are asking these questions.” Only scholars affiliated with academic institutions are eligible for support from the center, and Boushey stresses that their research needs to be clearly connected to the real world. When thinking about grants, she says, “we’re not just thinking 'is this an awesome idea,' but 'is it an idea that can influence the policy debate?'”

The center’s strategy—of backing academics to do policy-relevant research, particularly younger scholars—has long been embraced by conservative funders like the Bradley Foundation. The creation of the Washington Center by the Sandler Foundation is more evidence that funders elsewhere on the political spectrum get the importance of this approach. The question now is how much additional support the center can pull in as it gets up and running.

Its prospects do seem bright, with rising anxiety about inequality and more funders paying attention to this issue. The Ford Foundation has said it will put new resources into battling inequality, including to support economic research, while the Arnold Foundation recently made a grant to the Center for Equitable Growth at the University of California, Berkeley. More research money is sure to flow, and it’s a good bet that some will go to Washington Center, with its unique position at the crossroads of academia and national policy.