Inequality is bad for growth

The Economist spells out the message – inequality is bad for growth. And the growth they are talking about is plain old-fashioned GDP, not newer measures of happiness or well-being.

They are drawing on an IMF study assessing the causes and consequences of rising inequality. The IMF estimates:

    that a one percentage point increase in the income share of the top 20% will drag down growth by 0.08 percentage points over five years, while a rise in the income share of the bottom 20% actually boosts growth.

Some inequality is necessary to provide reward for effort; it’s a matter of finding the optimum balance.

This graph plots the change in income going to the top 1% against changes in the top marginal income tax rate:


Some countries, such as Japan, France and The Netherlands, have reduced top marginal taxation without increasing inequality. As usual, what is happening in the US and to a lesser extent in Britain is seen in a negative light.

It raises the question of what the ideal political economy should look like. Recently (see Quiggin’s post and document) a progressive alternative economic agenda is mysteriously emerging in time for Labor’s national conference:

    A new grassroots movement is underway which should demonstrate to next month’s ALP National Conference that there is strong community support for a progressive change to Australia’s cosy consensus-at-the-top that ‘markets are best’.

    Instead of a public debate about the real drivers of and dangers to our economic and social security and prosperity, the focus continues on ‘more of the same’ extreme fetish for a Budget surplus, smaller government, lower taxes and ever more privatisation and deregulation.

    A People’s Economic Alternative is emerging to call on Australians to engage with each other to devise a new economic direction which can overcome the ever-widening inequality and ever-greater insecurity that mark the lives of more and more people, and meet the challenge of ecological sustainability at a time of accelerating and unmitigated climate change.

    A People’s Economic Alternative is an initiative of trade unions, welfare, community and political organisations. These organisations have memberships totalling over 300,000 and this is the basis for a new grassroots initiative to change the debate over the next two to three years.

The underpinning values are:

Equity; Fairness; Equality of opportunity; Recognition of the rights of future generations; Basic equality of outcomes, e.g. a living wage and dignified social support; Recognition of roles of both markets and government; Respect for science and education, e.g. economics is much more than a slogan like ‘markets rule’; People’s wellbeing is the ultimate objective, not profits.

    Ten principles then follow, with the statement signed off by:

      Australian Manufacturing Workers Union National; Construction, Forestry, Mining & Energy Union; Finance Sector Union National, Maritime Union of Australia Sydney Branch; Fire Brigade Employees Union NSW Branch; National Tertiary Education Union NSW Branch; ALP Socialist Left NSW; Greens NSW; SEARCH Foundation; Evatt Foundation; F-Collective; No Westconnex Community Action Groups; Migrante Australia; AFTINET; Australian Political Economy Movement; Immigrant Women’s Speakout; Asian Women at Work.

    The Economist says that:

      Inequality could impair growth if those with low incomes suffer poor health and low productivity as a result, or if, as evidence suggests, the poor struggle to finance investments in education.

    This still views people according to their utility for producing goods and services within the narrow confines of the economic system. The concern is for more efficient workers.

    Our vision should be that our life chances are not affected by the circumstances of our birth.

    The Gonski education and National Disability Insurance schemes were essential pillars in building such a vision. The vision would also contain adequate funding for vocational and further eduction, support of science, research and development, a justice system available to all, accessible and cheap health and dental services, funding for the arts, the elimination of homelessness, plus pensions and transfer payments sufficient to allow a dignified existence for all. No doubt you can think of more.

    The Gillard Government was active in some of these areas, but probably needed to expand the public sector by at least 10%. The Abbott/Hockey government seeks to punish the leaners, and to put the best gloss on it, depend on individual effort and responsibility. The poor are leaners, rather than lifters and characterised as indolent or worse.

    In seeking an economy that serves society, rather than the reverse, the People’s Economic Alternative is trying to reverse a three decade’s long conventional wisdom about what constitutes good and credible economic policy.

    More power to them!

47 thoughts on “Inequality is bad for growth”

  1. If the ” income equality gap ” widening causes the lowest quintile of income earners to have a lower standard of living then we should do something about it.

    But it doesn’t, so we shouldn’t.

  2. Zoot, thanks. Antarctic weather coming north has frozen my brain.

    Jumpy that’s a non sequitur. It assumes that income inequality doesn’t do any harm. It does, both to the poor and it turns out to the economy as a whole.

  3. Arctic weather coming north has frozen my brain.

    When it unfreezes, correct that to Antarctic. 🙂

    It assumes that income inequality doesn’t do any harm. It does, both to the poor and it turns out to the economy as a whole.

    Can’t be, if I ( as a low 20%er ) create a service, work 20 hours a day to grow it, employ 100 people and become a high 20%, how is that bad ?

    These people rise the tide for everyone, they sponsor local sporting clubs and charities at their grassroots.

    The vast majority of 1%er in my area do enormous amounts of public good using their own time and money.
    Keynesian economists never ever include this, or choose to intentionally leave it out.

  4. Jumpy, you’re tilting at windmills. The post is not arguing against the work ethic or how generous rich people may be.
    Very simply, the figures demonstrate increasing inequality reduces economic growth, which is so obvious that the appropriate response really should be, “No shit, Sherlock?!”

  5. From the post, which was from The Economist article:

    Some inequality is necessary to provide reward for effort; it’s a matter of finding the optimum balance.

    I agree, and that’s all I want to say!

  6. …..the figures demonstrate increasing inequality reduces economic growth…..

    What figures, Sherlock ,very simply?

  7. extreme fetish for a Budget surplus, smaller government, lower taxes and ever more privatisation and deregulation

    …. in other words: Look out, Third world, here we come!

  8. Brian
    We will never have ” equity ” in humans, in any area.
    The strong are dragging the weak as they have learned to do, in ever increasing numbers.
    Why they do it with all the scorn and no thanks from the beneficiaries is a testament to their strong character.

    They should at least be allowed to choose which weak to carry.

  9. Underlying the success of the developed world over the 20th century were unions with enough power to get a fair share of the economy. Getting a fair share helped grow the purchasing power of the workers.
    It was this increasing purchasing power that justified the investment in more capacity and higher efficiencies which led to more purchasing power which…….
    It has struck me for a long time that there was something strange about a system that pays people a lot more per hour for jobs that are challenging and satisfying and usually involve working in very comfortable environments.
    The economy is made for man, not man for the economy is a useful slogan.

  10. Karen, he certainly hasn’t read Barbara Ehrenreich’s Nickel and Dimed.

    Jumpy, it’s about equality of opportunity, not equality of outcomes. Your kind of thinking leads to a situation where people in poverty are effectively trapped.

    The IMF research suggests that this is no good for the economy as such.

    John D, Henry Ford was criticised for paying his workers more than the minimum wage. His response was that he wanted his workers to be able to afford to drive “T” Model Fords. Now we outsource to Asia or somewhere the workers are out of sight and out of mind.

  11. Jumpy (at 9:06pm on 13th). Well, no. The Greeks may well have, unintentionally, triggered the collapse of our faux-capitalism just as the Lithuanians’ religious observances, unintentionally, triggered the collapse of Soviet faux-communism. Frustration and humiliation are already making people question their tolerance of an eternally unsatisfying system.

  12. Brian

    Now we outsource to Asia or somewhere

    How is swapping 1 fat Australian Ford employee that’s heavily subsidised and one of the wealthiest humans on Earth for 10 Asians being lifted out of extreme poverty not reducing inequality and ultimately reducing the cost burden for Australias poor, would be car purchasers ?

  13. Jumpy: The next step is replacing people like you with imported contractors who can communicate with the 10 working Asians and the Asian company who is the lead contractor?
    The interesting thing though is the Asian country selling cars to Australia is not going to be helped if Australians are replaced with cheap labour.

  14. Jumpy, you’re all over the shop trying to justify the unconscionable exploitation of workers, and rampant capitalism generally.

    About 10 years ago I recall the example of a sporting apparel company, it could have been Nike. The entire manufacturing workforce of 15,000 was paid $25 million pa. That breaks down to about $6 per day. Michael Gordon was paid $18 million a year to advertise the stuff. The clever CEO was on a mere $31 million.

    It’s not OK, even if the workers would otherwise starve.

    So what is OK?

    I’d suggest the CEO should not get more than 15 times the frontline workers. Beyond that everyone should benefit a bit, or it should be written into trade agreements that appropriate tariffs could be charged.

  15. Jumpy: The image of an overpaid Australian worker being replaced by ten underpaid off-shore workers is very appealing – almost convincing.

    However, the huge elephant in the room is History. Why is it that Australian wages, costs-of-living, housing, costs of production, balance-of-trade deficits and the like became so artificially bloated AGAINST the wishes of workers and small-to-medium businesses during the Menzies regime? Forget the convenient news media myth that the evil Unions were all communist-inspired greedy-grubs. Talk to some old retired union rank-and-files: ask them about meetings where workers tried to reject demands for wage increases which were a lot more common than is imagined. Many of the workers – and their families – were frightened of inflation and had hard experience of wages chasing prices. They also knew too well that if the cost of their labour was too high, the firms that employed them could go out of business. This is why there was a lot of distrust, back then, of union officials who were referred to very scornfully among workers themselves as bosses’ top-offs, the banks’ b-boys and the “left hand of capitalism”. Unions were seen as a necessary evil as protection against the even worse evil of exploitative, thieving employers.

    Many ordinary workers were aware of current affairs; they knew full well that, even with British Commonwealth trade schemes, we did have to be internationally competitive and that unjustified subsidies to Country Party supporters and to manifestly inefficient firms was getting us further and further into trouble. As more and more European migrants joined the workforce here, they added their own experiences to lunchtime conversations at the workplace and so increased the overall awareness, among the Australian workforce, of the need for international competitiveness.

    There was a lot more resistance to higher wages and a lot more interest in innovation and in increasing REAL productivity by Australian workers than is churned out in the official line.

    Don’t blame the Aussie workers. Instead, blame the major transnational conglomerates, the political operators, the finance industry and the predatory creditors.

  16. Brian.
    Please, you jump for joy when the same workers make solar panels cheaper.
    Nike as a publicly floated company, your beloved stock market sees the CEO worth that much based on comparitive competitive performance.

    All the while these workers, in their droves, choose to earn more than they could ever dream back in rural agrarian poverty.

    Capitalism and trade raises the tide for everyone, to hate them because a tiny few get very wealthy is ridiculous.

  17. Jumpy, you are putting words into my mouth. The stock market is not beloved by me. It’s just a fact of life.

    If workers are exploited anywhere I’m displeased.

    The main message of the post was pretty straight forward. You are doing everything to distract and detract. Read it and wear it!

  18. Brian

    I just disagree with the post.
    World GDP is growing in spite of weakening population growth rate trend and income gap rate increasing.

    It was just assumed, by some, that capitalism harms GDP, it doesn’t, quite the opposite.

    Let’s not get tetchy now. 🙂

  19. Jumpy, I’m not tetchy but you’re not entitled to disagree! We are talking fact, not opinion!

  20. Jumpy, you’d need to look at the research, which is paywalled, but I’d wager they could have said “the IMF calculates”. If they estimated, then there was a basis to it, not just opinion.

    Anyway, they didn’t say capitalism harmed GDP, they said inequality, which is more specific. Capitalism is a regulated system. We should look to tweak the regulations to minimise harm.

  21. Jumpy says : “Capitalism and trade raises the tide for everyone … ”

    Capitalism doesn’t work well in the absence of good governance, as any number of God-forsaken hell holes in the third world prove. It hasn’t worked well for various indigenous peoples, for example those who’ve had their land stolen and been exterminated such as those in Amazon whose land has been brought into the capitalist system by entrepreneurial thieves.

    You also say: “Nike as a publicly floated company … ”

    It was the Government that invented the modern corporation that is the backbone of modern capitalism and which gave it certain privileges not available to common folk, such as limited liability. Back in the day, classical liberals thought this was a terrible idea. Turns out Nanny got that one right.

    When I here Anal Rand fan boys such as yourself dribble on about how you’d be a billionaire if only the Government and the inferior masses weren’t holding you back, my standard advice is “Go west, young man”, or in other words, make your way to the lawless badlands in DR Congo or Somalia or the Sahel and see how you fare. My bet is most of you teabagging nancy boys would soil your lederhosen and curl up in a ball within five minutes.

    Alternatively, why not buy a share in libertarian paradise, ie. Galt’s Gulch in Chile. Sure, the place is dysfunctional, unproductive, full of venom and hate and everyone is suing everybody else but at least you’ll be in a cage with like minded animals. Don’t let the door hit your ass on the way out … I’ll even chip in for your ticket, provided it is one-way.

  22. Sorry the italics should have finished after “say!”
    I must have forgotten to end them.

    [Val, I’ve deleted the first comment and fixed the one below – Brian]

  23. Trying again – see if it works this time

    Brian (and anyone else interested)
    as you may remember, I’m interested in people’s views on equity/inequity. You say

    From the post, which was from The Economist article:

    “Some inequality is necessary to provide reward for effort; it’s a matter of finding the optimum balance. ”

    I agree, and that’s all I want to say!

    I wonder why you agree with that? Do you think that “some inequality” is needed to keep GDP growing, or to keep capitalism going, or just that it is an essential part of any viable human society (which of course is not true historically or globally, but perhaps you think it is in the context of contemporary Australia or wealthy nations generally)?

    Also Jumpy, I am interested in who you think are the “weak” that the “strong” are dragging along. Most net tax-transfer beneficiaries are older people on pensions, children, young parents, especially mothers, who are (usually for a short time) out of the paid workforce, and people with disabilities. Are they the “weak” you are referring to? What would your ideal society look like if the “strong” didn’t share their income with those people?

  24. Sorry Brian can’t get it to work properly (should have used your preview function) – please feel free to correct and delete as applicable

  25. I would’ve thought it was obvious that an industrial society needs inequality and that it would be impossible to have complete equality. Certainly any attempt to impose equality would require draconian Government intervention in everyone’s lives. Notably, the twenty or so experiments in socialism from last century only succeeded in producing poverty and oppression for all but the power elite.

    I also don’t buy the claim that everyone was “equal” in pre-industrial societies. Undoubtedly if you look hard enough you’ll find some anthropologists and other social scientists who claim such societies do exist or have existed, after all, several million people have qualifications in these fields, but IMO they are a tiny minority with less than convincing arguments.

  26. Val

    Also Jumpy, I am interested in who you think are the “weak” that the “strong” are dragging along. Most net tax-transfer beneficiaries are older people on pensions, children, young parents, especially mothers, who are (usually for a short time) out of the paid workforce, and people with disabilities. Are they the “weak” you are referring to? What would your ideal society look like if the “strong” didn’t share their income with those people?

    Hello again Val, how are you going ?
    Il preface my response with an undeniable truth.
    If I give a dollar, the recipient gets a dollar.
    If government takes a dollar to distribute on my behalf, the recipient gets less than a dollar. ( some estimates between 40-60 cents )
    That said,
    Yes, the aged, in family homes preferably not Aged Care Facilities.
    Children are the responsibility of their parents, so yes.
    Young parents, not at all.
    People with disabilities, yes of course.

    ” dragging ” was probably better replaced with ” aiding or helping ”
    People in a position to help, do naturally, every day.
    I just happen to believe cutting out the bloated middleman is vastly more cost effective and often has far better results for those in need.

  27. Val, if you hover the cursor over the tab immediately to the right of LINK above the comments box, you’ll see faintly “B-QUOTE”.

    Highlight and click on that for quotations. I’ll comment further on your comment later tonight.

  28. Thank you Karen for your replies. To respond in full would take a long time so I’ll just make some brief points.

    Karen your first statement seems to be an assertion that inequality is necessary rather than evidence that it is. Although it may seem like common sense, it’s impietant not to confuse the way things are. With the way things have to be.

    Also on the point of socialist countries, Russia wasn’t comparatively that poor for many years, whereas now since the end of communism, much of the population is drastically poor, even if a few are billionaires. I also think it’s important to make the point that wealth as measured by income isn’t necessarily the same as wellbeing. Case in point being Cuba, which has far lower median income than USA, but similar longevity and lower infant mortality.

    The point of the article Brian cited was about growth, of course, but health and wellbeing are important. Moreover you would have to take into account in that case that a large part of the reason for Cuba’s low income was economic sanctions by the U.S., ie you can’t divorce economics and politics.

    Finally I’d note that cooperatives, like Mondragon, have a much lower pay inequality rate than most corporations. Sure they still have some pay differentials, but it demonstrates that huge pay differentials aren’t necessary.

    Hugh Stretton argues pretty convincingly that growth rates were higher in the post World War Two period when most Anglosphere countries had lower wage differentials and stronger social security systems, than in the years since the 1980s, when pay differentials have increased and social security wound back.

    Jumpy – I think it would be useful if you familiarised yourself a bit with the history of Australia’s tax-transfer and welfare systems. I won’t go through it all now, but just one point, for example, Australia has had income support for families for over a hundred years. Some has been through the state and some through employers, but it’s all been state regulated. Not sure what era you are harking back to in your comments, but most societies actually do provide support to families and have done one way or another for a very long time.

    The reason we have communal or state run welfare systems is that it is hard to organise welfare on a purely individual basis, and not always possible. Think about if you lived in a small community that was affected by a highly infectious disease, for example. As to whether it’s more or less efficient, you’d have to look at that on a case by case basis I think, you can’t just generalise.

  29. Meant to say thank you Karen and Jumpy. Also please excuse typos. I really should use that preview function!

  30. Jumpy: Difference and Diversity within a society is not only inevitable but desirable. Think of all the stale and failed societies that remained or became backward because the natural tendency to variety and difference was thwarted.

    Inequality looks similar to Difference and Diversity but they really are poles apart.

    Look at all the societies where inequality flourished: they may have conquered and prospered for a few generations, perhaps even a few centuries, but then their elites succumbed to luxury, squandering and softness. A few societies, such as lucky England, managed to last well past their “use-by” date by a century and a half. However, eventually England too was brought to near ruin by its entrenched system of inequality.

    One of the reasons Australia has gone down the gurgler is that too much encouragement was given to Inequality – but too little was given to Difference and Diversity.

  31. Thanks Val.

    You say:

    Although it may seem like common sense, it’s imp[or]tant not to confuse the way things are. With the way things have to be.

    I believe in a caused world, therefore what exists now or in the past is the only thing that is or was possible. But yes, things will undoubtedly change in the future.

    I don’t like our current levels of inequality, I agree the level is not economically necessary and I would happily pay more tax to help out the less fortunate, provide for better schools and so on. However I do believe people respond to incentives and that it would be unjust to enforce absolute equality, regardless of effort.

    You write of Russia and Cuba. As I recall it, Russia had to use draconian measures to stop people leaving the country and the same goes for Cuba, which as seen over one million people flee when given the opportunity. This doesn’t suggest high levels of wellbeing, a topic you have now raised in addition to equality.

    You might be interested in this Pew Survey of public attitudes in the former Eastern Bloc conducted in 2009. The public in most of the surveyed countries support the transition to democracy and capitalism although support has fallen markedly since 1991. Transition was never going to be easy but it is good to see that younger age groups are much more positive than their elders in every country surveyed.

    You also mention life expectancy in Cuba compared with the USA. It reminds me of my husband’s grandmother, who recently died at age 105 after having lived through many years of hard physical work, hunger, malnutrition and war. Our bodies are not designed for loafing and largesse yet our brains, which evolved in leaner times, haven’t caught up with this fact. I would like to see the Government crack down heavily on the purveyors of junk food inter alia otherwise life expectancy will start tumbling, in fact it already has among some groups in industrial societies.

  32. I prefered to be paid by the hour vs fixed salary because on hourly pay there were times when i could choose to work less hours without feeling that I was being unfair to my employer. (At times, of course, I have worked longer hours than i wanted to while on an hourly rate because of a sense of professionalism that understood something really did need to be done before I went home.)
    In addition, if i had a choice of jobs I would only choose a less attractive job if the pay rate was higher.
    The other observation I would make is that pay rise time was often a time when many people were demotivated because they felt that they should have got more than someone else.
    I far preferred to have people working for me who were motivated by the chance to get things done and think for themselves rather money. (Attracting people to be CEO’s by offering lots of money seems like a recipe for attracting duds we seem to be getting to me.)
    Which is all a long way of saying that some inequality is fair, but not anything like as much a is common now days.

  33. Plus abolishing the welfare state would mean being swarmed every day by an army of beggars, grifters and petty thieves. It also creates moral hazard, with the unscrupulous misusing children to collect money for their own ends and of course the prostituting of women and children. I’ve seen far too much of this in my travels to my husband’s country of birth and the novelty soon wears off. People like Jumposaurus probably get off on that type of thing but most of us have climbed far enough up the evolutionary ladder to aspire to something more noble.

    The welfare state was invented precisely because private charity is inadequate, inefficient, undignified and fraught with moral hazard.

  34. Val, in this comment in none of examples is inequality eliminated.

    I agree with Karen that there was likely a degree of inequality in traditional societies.

    Francis Fukuyama in his The Origins of Political Order goes into the various factors, but think of property ownership and war. The smallest unit of social/political organisation was the “band” based usually on kinship. Even in hunter-gatherer societies their was a collective sense on ownership of territory. To defend the territory you will have an emerging warrior class where not everyone is equal.

    When bands grouped into tribes this became even more evident. Fukuyama talks of the ‘big man’ concept, where the leader was ‘elected’ at the behest of the tribe on the basis of what he did for the tribe. Hereditary didn’t come into it.

    Where you get private property ownership you immediately have hierarchies, usually patriarchal, and inheritance.

    Show me the advanced industrial society with common ownership of property, but with the dynamism and scope for Graham’s difference and diversity equivalent to what you get in capitalist society and I’m all ears.

    Show me the society where greed is entirely replaced by altruism, but still has the scope for individuals to create their own future.

  35. Brian:

    “I agree with Karen that there was likely a degree of inequality in traditional societies.”

    Unfortunately some anthropologists, undoubtedly with good intentions, have tried to rewrite history to make primitive societies appear much more benign and congenial than they really were. The hagiographical nonsense about “the elders” is one such example. Interestingly, there are several good anthropological records of the rule of the elders (read grumpy old men and usually to a much lesser extent women, who try to monopolise status, prestige and resources) becoming so oppressive that the young men bumped them off.

  36. A few comments about the Warndilyagwa people we were familiar with in the seventies:
    All the able men were warriors.
    There were noticeable inequalities in terms of gender and age.
    Historically, elder sons would get more wives than younger ones. Influential men also got more wives later in life.
    The flow of power was hard for outsiders to follow with confidence. Who did the talking was not a reliable indicator of power – But some men were more influential than others.
    Food was split on the basis of formal rules based on how people were related to the successful hunter. In theory, someone could go hungry if they were not in the right relationship with anyone.
    Conclusion: Some inequality but not of the same magnitude as in more developed societies.

  37. Karen (at 10;21pm 16th): Where you have a society in which inequality has become entrenched ( and is SEEN as entrenched inequality ), worker morale and quality productivity suffer. Yes, all the trappings of workers’ joy, numerical productivity and obsequiousness are there – but there is no personal investment in the job. Add to that, casual or short-term employment, tricky cheating on wages and working conditions, an obsession with getting the highest, hit-and-run profit for the lowest cost of production, bloated executive salaries and then an aristocratic sense of entitlement among barely-competent management people and you have a perfect recipe for social and economic backwardness.

    Welcome to Soviet Australia 2015. Enjoy the standard of living in 2015 because – thanks to entrenched inequality – each succeeding year will bring a lower and lower standard of living to a larger part of the populace. To paraphrase the Chinese explanation of their own system, ” This is Capitalism with Australian Liberal Party characteristics”

  38. Karen, I just want to respond to what you said about “rewriting history”. I know it’s a popular expression, but if you think about it as a pejorative expression, it doesn’t make much sense.

    There is no one correct version of history – it’s always contested. Even in my ideal egalitarian society, there would be still be disagreement and conflict (there would just be non-violent ways of resolving it).

    As regards ‘what actually happened’ people can always disagree, see things differently, interpret evidence in different ways. New evidence can emerge, new techniques for understanding the past, new interpretations. History is just a story about the past, and it can always be rewritten – there’s nothing wrong with that.

  39. Val,

    Thanks for sharing your thoughts, Val.

    If an historian belts history on an anvil with a hammer until it fits his or her already existing preferences, that is intellectually dishonest and reprehensible- there’s everything wrong with that. It makes no difference if it is David Irving’s bad-intentioned holocaust revisionism or [insert name]’s well-intentioned pre-industrial equality revisionism.

    I’m a social scientist by training and I am repulsed by the way so many left wing academics and right wing think tank flunkies have succumbed to intellectual dishonesty to serve their allegiances over the last 30 or so years.

    I want to help build a more equal society, but as the Eastern Bloc demonstrated, it cannot be done on the basis of falsehoods.

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