Inequality Harms the Economy: Berg & Ostry

A major study by the IMF has some interesting implications for the Mitt-wits of the world. Not only should growing inequality in nations be considered a moral negative, it is also “bad for the health of capitalists.”

It essence, what we have  is a proof of the Jeremy Grantham thesis that we should always be wary of capitalists because of the very nature of capitalism.

In recent work  (Berg, Ostry and Bettelmeyer, 2011; and Berg and Ostry, 2011), Berg and Ostry state they they discovered that when growth is looked at over the long term, the trade-off between efficiency and equality may not exist. In fact equality appears to be an important ingredient in promoting and sustaining growth.“ Released in September, the study more specifically concluded that a 10 percent decrease in inequality increased the expected duration of economic growth by 50 percent.

The IMF paper studied a sample of countries around the world between 1950 and 2006 and found that in countries with more income inequality, such as Jordan and Cameroon, the economy more frequently plunged into deeper recessions, while economic growth lasted much longer in more equal societies.

What is interesting is that they are approaching this without any of the bias which we have come to expect from the Chicago school and others where the facts always lead to the predetermined conclusion. The authors state that:

 we study growth spells as medical researchers might examine life expectancy. They study the effects of age, weight, gender, and smoking habits on life expectancy; we look at whether factors such as political institutions, health and education, macroeconomic instability, debt, and trade openness might influence the likelihood that a growth spell will end. The result is a statistical model of growth duration that relates the expected length of a growth episode (or, equivalently, the risk that it will end in a given year) to several of these variables.

Here is the reference to their summary: http://www.imf.org/external/pubs/ft/fandd/2011/09/Berg.htm

Here is the full report. http://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf

This is a landmark study in that it negates the validity of the infamous trickle-down effect for planning tax rates, incentives and regulation and makes it clear that intelligent societies will monitor the staus of inequality with as much care as they give to interest rates, trade balances and GDP growth or decline.

As Europe (and Canada) swing back to more progressive and developmental practices, the influence of these studies will be a thorn in the eye for the doctrinaire right wingers.

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