Friday, November 02, 2012 10:50:21 PM
3Saints - IMF: Income inequality is bad for economic growth
Posted by Brad Plumer at 11:10 AM ET, 10/06/2011
As the Occupy Wall Street protests swell in size and people pay closer attention to the gap between the wealthiest Americans and everyone else, one question is why this divide even matters. One way to look at income inequality [ seems yours ], after all, is that it’s no big deal. If a country is growing at a healthy clip and everyone is steadily getting richer, then it’s hardly an outrage that a few titans at the very top are doing freakishly well, right?
But a recent study from the International Monetary Fund suggests that this conventional view is misguided. Excessive income inequality, the authors find, can actually inflict a lot of harm on a country’s long-term economic prospects.
In the IMF’s Finance & Development magazine, the authors, Andrew Berg and Jonathan Ostry, summarize their recent research .. http://www.imf.org/external/pubs/ft/fandd/2011/09/Berg.htm .. (see also Josh Harkinson’s piece .. http://beta.motherjones.com/mojo/2011/10/study-income-inequality-kills-economic-growth?wpisrc=nl_wonk .. for Mother Jones). It’s relatively common, the authors note, for countries to experience small growth spurts here and there. But sustained, long-term economic growth, of the sort that the United States and Britain enjoyed after World War II, is rare. Plenty of poorer countries — say, Brazil or Jordan or Cameroon — don’t ever seem to be able to maintain that momentum.
For sustained growth to occur, Berg and Ostry found, the most important factors are a relatively equal income distribution and trade openness. (See the chart on the right. [ below ]) Having healthy, democratic political institutions matters quite a bit, too. Conversely, having a lot of foreign investment or keeping debt under control, among other factors, aren’t nearly as crucial. In the end, the most important factor is inequality: “a 10 percentile decrease in inequality... increases the expected length of a growth spell by 50 percent.”
Why would inequality be so crushing for a country’s economy? For one, the authors note that inequality tends to be associated with financial crises. When inequality runs rampant, people on the lower end tend to borrow more to keep up, which increases the risk of a major crisis. (Earlier IMF research .. http://www.imf.org/external/pubs/ft/fandd/2010/12/Kumhof.htm .. suggested that this may have contributed to the 1929 and 2008 financial crashes in the United States.)
What’s more, inequality can foster political instability, which discourages investment. Berg and Ostry also argue that inequality makes it harder for governments to deal with external shocks — it’s politically dicey to, say, cut public spending to avoid a debt crisis when the middle class already feels like it’s falling behind.
Do these lessons apply to the United States? They might. In 2005, Ohio State University’s Mark Patridge conducted a study .. http://osu.academia.edu/MarkPartridge/Papers/189386/Does_Income_Distribution_Affect_US_State_Economic_Growth_ .. of economic growth in the 50 states and found that “a more vibrant middle class… increased long-run economic growth.” In Democracy earlier this year, David Madland tried to tease out .. http://www.democracyjournal.org/20/growth-and-the-middle-class.php?page=all .. the causality, arguing that societies with less inequality and a stronger middle class tend to have more trust, less corrupt governance and stronger “capitalist values” that encourage entrepreneurship.
http://www.washingtonpost.com/blogs/ezra-klein/post/imf-income-inequality-is-bad-for-growth/2011/10/06/gIQAjYADQL_blog.html
See also:
The Great Gatsby Curve
January 15, 2012, 2:34 pm
Alan Krueger, the chairman of the Council of Economic Advisers — who is not only a colleague of mine at Princeton, but gets a lot of my mail and vice versa — gave a very informative speech .. http://www.americanprogress.org/events/2012/01/krueger.html .. on inequality last week that should have received more press than it did. Much of it was stuff that inequality mavens already know, but he had one striking result that was what I suspected but hadn’t seen demonstrated: a clear negative relationship between inequality at a point in time and intergenerational social mobility. .. more .. http://investorshub.advfn.com/boards/read_msg.aspx?message_id=80526270
Romney would be a backward step .. bits ..
MARTIN WOLF
If there is one thing on which almost all Americans agree it is that the performance of their economy has been disappointing: growth is too slow and joblessness is too high. A large proportion of the electorate is prone to blame the president for its disappointment. It is a wonder that, in these circumstances, Barack Obama still has a chance of winning. Nor is this state of affairs surprising. Early in February 2009, I opened a column by asking: “Has Barack Obama’s presidency already failed?” My argument was that “doing too little is now far riskier than doing too much”. The president did indeed act, but not decisively enough.
That was the past. Now consider the future. I suggest that four economic challenges
are particularly important: demand, supply, inequality and fiscal solvency. [...]
The second challenge is supply. [...]
The third challenge is inequality. Here changes are profound (see chart). Apparently, 90 per cent of US income gains since the end of the recession have accrued to the top 1 per cent of the income distribution. As the Congressional Budget Office notes, “real (inflation-adjusted) mean household income, measured after government transfers and federal taxes, grew by 62 per cent between 1979 and 2007. Over the same period, real median after-tax household income grew by 35 per cent.” This divergence has two implications. First, changes in GDP fail to measure those in economic wellbeing across the population. They measure changes at the top, instead: since the top 20 per cent earns 60 per cent of market-based income and the top 1 per cent earns far more than the bottom 40 per cent, that is obvious. Second, to the extent that a child’s opportunity depends on the resources of its parents, the result will be cumulative disadvantage. The more important human capital is, the more powerful this must become. .. more .. http://investorshub.advfn.com/boards/read_msg.aspx?message_id=81002301
Posted by Brad Plumer at 11:10 AM ET, 10/06/2011
As the Occupy Wall Street protests swell in size and people pay closer attention to the gap between the wealthiest Americans and everyone else, one question is why this divide even matters. One way to look at income inequality [ seems yours ], after all, is that it’s no big deal. If a country is growing at a healthy clip and everyone is steadily getting richer, then it’s hardly an outrage that a few titans at the very top are doing freakishly well, right?
But a recent study from the International Monetary Fund suggests that this conventional view is misguided. Excessive income inequality, the authors find, can actually inflict a lot of harm on a country’s long-term economic prospects.
In the IMF’s Finance & Development magazine, the authors, Andrew Berg and Jonathan Ostry, summarize their recent research .. http://www.imf.org/external/pubs/ft/fandd/2011/09/Berg.htm .. (see also Josh Harkinson’s piece .. http://beta.motherjones.com/mojo/2011/10/study-income-inequality-kills-economic-growth?wpisrc=nl_wonk .. for Mother Jones). It’s relatively common, the authors note, for countries to experience small growth spurts here and there. But sustained, long-term economic growth, of the sort that the United States and Britain enjoyed after World War II, is rare. Plenty of poorer countries — say, Brazil or Jordan or Cameroon — don’t ever seem to be able to maintain that momentum.
For sustained growth to occur, Berg and Ostry found, the most important factors are a relatively equal income distribution and trade openness. (See the chart on the right. [ below ]) Having healthy, democratic political institutions matters quite a bit, too. Conversely, having a lot of foreign investment or keeping debt under control, among other factors, aren’t nearly as crucial. In the end, the most important factor is inequality: “a 10 percentile decrease in inequality... increases the expected length of a growth spell by 50 percent.”
Why would inequality be so crushing for a country’s economy? For one, the authors note that inequality tends to be associated with financial crises. When inequality runs rampant, people on the lower end tend to borrow more to keep up, which increases the risk of a major crisis. (Earlier IMF research .. http://www.imf.org/external/pubs/ft/fandd/2010/12/Kumhof.htm .. suggested that this may have contributed to the 1929 and 2008 financial crashes in the United States.)
What’s more, inequality can foster political instability, which discourages investment. Berg and Ostry also argue that inequality makes it harder for governments to deal with external shocks — it’s politically dicey to, say, cut public spending to avoid a debt crisis when the middle class already feels like it’s falling behind.
Do these lessons apply to the United States? They might. In 2005, Ohio State University’s Mark Patridge conducted a study .. http://osu.academia.edu/MarkPartridge/Papers/189386/Does_Income_Distribution_Affect_US_State_Economic_Growth_ .. of economic growth in the 50 states and found that “a more vibrant middle class… increased long-run economic growth.” In Democracy earlier this year, David Madland tried to tease out .. http://www.democracyjournal.org/20/growth-and-the-middle-class.php?page=all .. the causality, arguing that societies with less inequality and a stronger middle class tend to have more trust, less corrupt governance and stronger “capitalist values” that encourage entrepreneurship.
http://www.washingtonpost.com/blogs/ezra-klein/post/imf-income-inequality-is-bad-for-growth/2011/10/06/gIQAjYADQL_blog.html
See also:
The Great Gatsby Curve
January 15, 2012, 2:34 pm
Alan Krueger, the chairman of the Council of Economic Advisers — who is not only a colleague of mine at Princeton, but gets a lot of my mail and vice versa — gave a very informative speech .. http://www.americanprogress.org/events/2012/01/krueger.html .. on inequality last week that should have received more press than it did. Much of it was stuff that inequality mavens already know, but he had one striking result that was what I suspected but hadn’t seen demonstrated: a clear negative relationship between inequality at a point in time and intergenerational social mobility. .. more .. http://investorshub.advfn.com/boards/read_msg.aspx?message_id=80526270
Romney would be a backward step .. bits ..
MARTIN WOLF
If there is one thing on which almost all Americans agree it is that the performance of their economy has been disappointing: growth is too slow and joblessness is too high. A large proportion of the electorate is prone to blame the president for its disappointment. It is a wonder that, in these circumstances, Barack Obama still has a chance of winning. Nor is this state of affairs surprising. Early in February 2009, I opened a column by asking: “Has Barack Obama’s presidency already failed?” My argument was that “doing too little is now far riskier than doing too much”. The president did indeed act, but not decisively enough.
That was the past. Now consider the future. I suggest that four economic challenges
are particularly important: demand, supply, inequality and fiscal solvency. [...]
The second challenge is supply. [...]
The third challenge is inequality. Here changes are profound (see chart). Apparently, 90 per cent of US income gains since the end of the recession have accrued to the top 1 per cent of the income distribution. As the Congressional Budget Office notes, “real (inflation-adjusted) mean household income, measured after government transfers and federal taxes, grew by 62 per cent between 1979 and 2007. Over the same period, real median after-tax household income grew by 35 per cent.” This divergence has two implications. First, changes in GDP fail to measure those in economic wellbeing across the population. They measure changes at the top, instead: since the top 20 per cent earns 60 per cent of market-based income and the top 1 per cent earns far more than the bottom 40 per cent, that is obvious. Second, to the extent that a child’s opportunity depends on the resources of its parents, the result will be cumulative disadvantage. The more important human capital is, the more powerful this must become. .. more .. http://investorshub.advfn.com/boards/read_msg.aspx?message_id=81002301
It was Plato who said, “He, O men, is the wisest, who like Socrates, knows that his wisdom is in truth worth nothing”
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