The most important inequality-related news of the week was the release of a new IMF report that found that lower inequality is correlated with faster growth. This marked an amazing reversal. The IMF made itself notorious over the years through its strong support of anti-equality economic policies such as austerity budgets and radically weakened labor laws—all in the name of economic growth and development.
But this week, the organization finally admitted that such policies aren’t associated with growth, after all. Indeed, according to their study, “redistribution appears generally benign in terms of its impact on growth” (emphasis theirs). Oops!
The IMF is hardly alone in taking this position. Unsurprisingly, conservative economists and pundits continue to insist that high levels of inequality are necessary for economic growth—you don’t want things so equal that those sainted “job creators” go Galt on you, do you? But a growing number of economists are coming to believe the opposite.
Joseph Stiglitz and Paul Krugman, for example, argue that inequality has slowed growth. Late last year, Jared Bernstein wrote this excellent report about the impact of inequality on growth. The report zeroes in on three theories about the relationship between growth and inequality that are particularly promising.
First, there are the demand-side theories. These theories are based on differences in marginal propensity to consume among different income groups. We know that low-income consumers are more likely to spend every last dollar, while high-income consumers tend to save. The idea is that, in a high-inequality economy, there’s less spending, and hence less growth, because the non-rich have lower incomes and thus less money to spend. In this paper, economists Heather Boushey and Adam Hersh cite research supporting this theory.
Second, there are political economy theories. According to this model, high levels of inequality cause the political process to “become increasingly solicitous of the preferences of the wealthy.” These preferences include what Bernstein refers to as “anti-Keynesianism and pro-austerity fiscal policies resulting in slack labor markets and output gaps”—in other words, macroeconomic policies associated with slow growth. Research by political scientists such as Larry Bartels and Martin Gilens, which shows that Congress tends to be extremely responsive to the preferences of wealthy constituents and far less so to everyone else, lends support to this interpretation.