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Inequality

Look Who’s Soured on Economic Inequality

Research & Commentary
September 16, 2011

by Inequality.org

Mainstream economists all around the world used to assume that equality acted as a drag on economic growth and development. Not anymore.

Inequality, a conservative online daily told its readers earlier this week, has been a “good thing” for America. We Americans, the claim continued, “live richer lives precisely because of the unequal distribution of wealth.”

That sentiment, not too long ago, used to pass as conventional economic wisdom — in far beyond conservative circles. Societies that tried to become more economically equal, the widespread assumption went, would always be less economically efficient. If you wanted to be efficient — and maximize your society’s economic growth — you had to tolerate inequality.

This world view still, of course, defines America’s conservative political mindset, and few mainstream politicos, among either Democrats or Republicans, ever stray too far from this bit of economic orthodoxy.

But elsewhere in the world, among perfectly respectable economists no one would ever dare dub radical, this notion that inequality has redeeming economic value — can, in effect, be a “good thing” — no longer figures in serious economic discourse.

Take, for instance, this just-published latest edition of Finance & Development, the International Monetary Fund quarterly journal, hardly a hotbed of dissident economic thought. The latest issue concentrates almost totally on economics and inequality.[pullquote]The more inequality in a society, the less the society’s ‘sustained growth.'[/pullquote]

The issue’s basic message? That comes through clearly in one contribution to the issue from Andrew Berg and Jonathan Ostry, both high-ranking IMF researchers.

“Do societies inevitably face an invidious choice between efficient production and equitable wealth and income distribution? Are social justice and social product at war with one another?” the two ask. “In a word, no.”

The more inequality in a society, Berg and Ostry demonstrate with data from all around the world, the less the society’s “sustained growth.”

Other contributors to this IMF special focus on maldistributed income and wealth go at various other aspects of inequality’s impact. Michael Kumhof and Romain Rancière track the linkages between inequality and rising indebtedness.

The world’s “main deficit countries,” the two researchers report, share “a steep increase in income inequality over recent decades, as measured by the share of income going to the richest 5 percent of the country’s income distribution.”

“An increase in inequality,” the Kumhof and Rancière data show, “translates into lower real wages for the bottom 95 percent of the population and higher indebtedness at home and abroad.”[pullquote]Increases in inequality translate into lower real wages for the bottom 95 percent of the population and higher indebtedness.[/pullquote]

The lead author in the new Finance & Development issue, Branko Milanovic, ranks as one of the world’s foremost authorizes on global income and wealth. His contribution surveys what we know — in effect, the economic “state of the art” — about global disparities and how these disparities play out in our real lives.

Milanovic, a top World Bank researcher currently at the University of Maryland, sees the “advantages to reducing inequality” as “both practical — facilitating economic growth — and ethical.” His analysis gives special place to education.

Without widespread education, Milanovic explains, modern economies cannot effectively develop. But without “relatively even income distribution,” he stresses, “broadly accessible education” becomes “difficult to achieve.”

What’s driving inequality in the world today? Milanovic describes a host of factors, some peculiar to individual nations and the economic decisions they choose to make, some more global. In either case, he believes, “government intervention can still curb the increase in inequality.”

Why don’t we witness more of that intervention? “A government’s refusal to take steps to minimize inequality,” Milanovic observes, may reflect a simple “political reality — that the rich wield a disproportionate influence over policy.”

That reality, these analyses from Milanovic and his fellow researchers show quite convincingly, desperately needs overhauling.

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