Growth and inequality

To explore the question further, our study estimated a relationship for GDP per capita in which a change in income inequality was added to standard growth drivers such as physical and human capital. The idea was to test whether the change in income inequality over time has had a significant impact on GDP per capita on average across OECD countries, and if this influence differs according to whether inequality is measured in the lower or upper part of the distribution. The results show that the impact is invariably negative and statistically significant: a 1% increase in inequality lowers GDP by 0.6% to 1.1%. So, in OECD countries at least, higher levels of inequality can reduce GDP per capita. Moreover, the magnitude of the effect is similar, regardless of whether the rise in inequality takes place mainly in the upper or lower half of the distribution.

This summary paragraph is from the OECD paper Growth and inequality: A close relationship?. To me, this makes perfect sense. Kleptocracies result in those in power stealing all the added value of commerce, which destroys the incentive of the producers to produce. Real democracies, where the government produce ‘public goods’ for the population at large do better than dictatorships where the leaders distribute all the net returns of the economy to their cronies. Of course, there is a continuum from a perfect democracy to a place like The Congo under Mobutu Sese Seko, but this is intuitively obvious, but is explained at book-length by Acemoglu and Robinson in Why Nations Fail.

From a perspective of demand management, it seems much more natural to tweak demand by redistributing from those with a low propensity to save to those with a high one, i.e. from the rich to to the poor. Of course, if inflation does run too hot, possibly reversing the policy might have to be tried. The UK gini coefficient has gone up a lot since 1977, to today, although it has not moved a great deal since 1990, according to Statistica.

“The deficit” is now regarded with absolute terror by the government, but at least if transfer payments from rich to poor were increased to offset the effect of increased taxation and reduced public spending, this would at least tend to offset the collapse in aggregate demand and thereby the likely depth of the recession. As forecasters seem to be talking of a ten-year recession, coming after agonizingly slow growth since 2008, now surely is the time to try something more radical than abolishing a cap on bankers’ bonuses.