Income Inequality Hinders Growth, Analysts Say

By Lowrey, Annie | International Herald Tribune, October 18, 2012 | Go to article overview

Income Inequality Hinders Growth, Analysts Say


Lowrey, Annie, International Herald Tribune


Economists once thought that economic inequality was a side effect of economic growth, but today, they are coming to believe that it fosters less stable economic expansions and sluggish growth.

Income inequality in the United States has soared to the highest levels since the Great Depression, and the recession has done little to reverse the trend, with the top 1 percent of earners taking 93 percent of the income gains in the first full year of the recovery.

The yawning gap between the haves and the have-nots -- and the political questions that gap has raised about the problems of the middle class -- has given rise to anti-Wall Street sentiment and animated the U.S. presidential campaign. Now, a growing body of economic research suggests that it might mean lower levels of economic growth and slower job creation in the years ahead, as well.

"Growth becomes more fragile" in countries with high levels of inequality like the United States, said Jonathan D. Ostry of the International Monetary Fund, whose research suggests that the widening disparity since the 1980s might shorten the nation's economic expansions by as much as a third.

Reducing inequality and bolstering growth, in the long run, might be "two sides of the same coin," research published last year by the I.M.F. concluded.

Since the 1980s, rich households in the United States have earned a larger and larger share of overall income. The 1 percent earns about one-sixth of all income and the top 10 percent about half, according to statistics compiled by the respected economists Emmanuel Saez of the University of California, Berkeley and Thomas Piketty of the Paris School of Economics.

For years, economists have thought of such inequality in part as a side effect of policies that fostered America's economic dynamism - - its tax preferences for investment income, for instance. And organizations like the World Bank and the I.M.F., which is based in Washington, have generally not tackled inequality in the world head on.

But economists' thinking has changed sharply in recent years. The Organization for Economic Cooperation and Development warned this year about the "negative consequences" of the country's high levels of pay inequality, and suggested an aggressive series of changes to tax and spending programs to tackle it.

The I.M.F., too, has cautioned the United States. "Some dismiss inequality and focus instead on overall growth -- arguing, in effect, that a rising tide lifts all boats," a commentary by fund economists said. "When a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss."

The concentration of income in the hands of the rich might not just mean a more unequal society, economists believe. It might mean less stable economic expansions and sluggish growth.

That is the conclusion drawn by two economists at the fund, Mr. Ostry and Andrew G. Berg. They found that in rich countries and poor, inequality strongly correlated with shorter spells of economic expansion and thus less growth over time.

And inequality seems to have a stronger effect on growth than several other factors, including foreign investment, trade openness, exchange rate competitiveness and the strength of political institutions.

For developing economies, the channels through which inequality might drag down growth seem clear. Inequality might foster political instability and lead to violence and economic destruction, for instance, a theme that fits for Arab Spring countries, like Egypt and Syria. …

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