Income Inequality vs. Growth

Yesterday’s International Monetary Fund reported hat the redistribution of wealth from top to bottom does not burden the economic growth less than what many economic literature indicated before. Before going any further into this discussion, let us explore the conventional story that is told and see what changes there might need be.

Equality vs. Efficiency is one of the issues that are handled heavily in policy making of many countries. Although people’s attitude about inequality may differ, but raised in the world of capitalism, I think most would agree that the function of inequality is rather important.  Adequate level of inequality is important in giving incentives for people to work harder; however, if all my hard work’s reward was redistributed to the people who did not work as hard, my motivation for work would be discouraged, lowering efficiency of human capital. And this is the very story that many capitalistic countries use as critiques against communist / socialist states.

Nonetheless, IMF says non-extreme methods of redistribution programs like taxes and social programs actually support growth rather than discourages it. Deputy director at the fund in research department, Jonathan Ostry stated the follwing:

“On average, redistribution seems to have helped support faster and more durable growth…There are merits to inequality, particularly as a motivational driver for growth, but inaction in the face of high inequality seems unwarranted in many cases. And excessive inequality seems more likely to weigh on growth by undermining access to health and education, and investment is deterred by as disparity between rich and poor brews political instability.”

Simply look back to the 2012 Occupy Wall Street Movement, the anger that surfaced from inequality. David Graeber, one of the leading member of the protest, is an economic anthropologist. He claimed in his book “Debt: The First 5,000 Years” that historically societies that maintained high levels of social safety net and debt restructuring program not only had more stable government in itself, but also stronger dominance among its neighbors. It is true Graeber’s approach is extreme and radical in many ways (although I think most college students would support his cancelation of college debt program), but his words rings truth with IMF’s support for more social safety net.

Even today, look at non-communist socialist countries in Europe. The Northern Europe is well known for their social programs, but they are also very renowned for quite high per capita GDP. Some may argue that it is because that they have high GDP, these countries are able to have these programs through taxation. I think there could be another vantage point to approach this situation. Perhaps it is assurance that working class has that people are able to excel in what they do and maximize their human capital efforts.

Anyhow, I think that reports like these are very important in taking back us into perspective. Of course, as a student studying economics, growth is a vital part if not the first thing on agenda in a country’s governance. However, we must also remember that the ultimate goal of these economic growth is to benefit all citizens of the country.

4 thoughts on “Income Inequality vs. Growth

  1. gkugler

    I connect the issue of income inequality to the slow rate of growth in average hourly earnings, which is basically caused by slow productivity growth. As capital investment continues to remain stagnated, the capital stock is not growing fast enough and this hinders productivity growth. Once we see the economy growing at a higher rate (i.e. at least 3% annually), then I would expect income inequality to decline.

  2. viczhou

    Undoubtedly, a certain level of income inequality is necessary for economic growth because it would offer financial incentive for people to work harder. Meanwhile, I very much agree with you that a more balanced growth calls for income redistribution through social welfare programs such as pension and insurance.

  3. psseo

    Nice post about very controversial issue of inequality. I don’t think that anybody expect same treatment for everyone. There should be some differences among people according to their ability or just pure luck. But I think that some people are exaggerating negative effects of increasing equality. With increasing equality, I believe that there should be more positive effects on economy than harm.

  4. enjar

    I think the best way to tackle income inequality is to provide everyone equal opportunity to education and health. Redistribution of wealth from the healthiest to the bottom could solve the problem for today maybe, but education with assurance of good health is could make anyone to achieve his or her potential.

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