Inequality – not just bad, it’s bad economics too

An IMF paper, published last week, has found not only that inequality is bad for economic growth but that redistribution of wealth does little to harm it.

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The paper’s authors, Jonathan Ostry, deputy head of the IMF’s research department, and the economists Andrew Berg and Charalambos Tsangarides, sounded nothing like those orthodox commentators – often to be found at the IMF in the past – who have argued that inequality is not something economists (or politicians) should be overly concerned with. Growth was the only real priority, they used to say. Get out of the way of the market and wealth would “trickle down”. This new paper sees things very differently:

“It would… be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable,” the authors wrote.

This is not news. As the economists Emmanuel Saez and Thomas Piketty wrote in The Guardian recently

“Countries that [have] made large cuts in top tax rates, such as the United Kingdom or the United States, have not grown significantly faster than countries that did not, such as Germany or Denmark… we have seen decades of increasing income concentration that have brought about mediocre growth since the 1970s.”

It is becoming clear to a growing number of people that the great financial crisis was caused by debt – mostly private sector and not public sector debt. Individuals built up unsustainable levels of indebtedness (mortgages, credit cards) sometimes to support consumer lifestyles that were in truth beyond them. And they did so trying to bridge gaps – inequality – in levels of income. Sometimes basic necessities were simply unaffordable. Housing, food and heating costs proved (and continue to prove) too great. But too much inequality can also turn some of us into “big spenders”, spending that we cannot always afford.

In his recent Hugo Young memorial lecture, Ed Miliband signaled his intention to engage much more energetically on this subject. “Tackling inequality is the new centre ground of politics,” he said. The remark did not receive much attention at the time. But it is the start of a major new offensive in the run-up to next year’s general election.

On this debate America is leading the way. The newly elected mayor of New York, Bill De Blasio, won on a “tale of two cities” campaign. Robert Reich’s new film “Inequality for all” has just been released, in the fashionable new way, on Netflix. 

Inequality harms us all. We all prosper in less unequal societies. As Prof Reich wrote in a recent blog post:

“The rich do better with a smaller share of a rapidly-growing economy than they do with a large share of an economy that’s barely growing at all…Higher taxes on the wealthy to finance public investments improve future productivity… All of us gain from these investments, including the wealthy.”

Reich is clear: “Broadly-shared prosperity isn’t just compatible with a healthy economy that benefits everyone — it’s essential to it.” That isn’t crazy left-wing talk. It’s common sense. And it is shared by the great majority of people.

Stefan Stern

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