OECD study shows inequality causes growth to slow

10 Dec, 2014 at 20:35 | Posted in Economics | 11 Comments

The Organization for Economic Cooperation and Development (OECD) has found that the divide between the richest 10 percent and poorest 10 percent in many of the world’s wealthiest countries – including Germany – has been growing. In a report released Monday, OECD said that this, in turn, had caused growth to slow …

oneOne result of the growing divide between rich and poor, the OECD report showed, was that gross domestic product (GDP) – measuring the general level of economic activity – was smaller than it would be if inequality had not increased …

Strong and sustainable GDP growth was only possible if governments take energetic and decisive measures against further increases in inequality, the OECD said. Suitable measures could include income or wealth redistribution through tax measures, and transfers of money and benefits to the poor …

The results reported in the new OECD study provide further statistical evidence of negative effects of growing inequality, complementing – using different sets of data – the results found by French economist Thomas Piketty, whose 2013 book “Capital in the 21st Century” has become one of the most talked-about economics books in decades …

The impact of inequality on growth stems from the gap between the bottom 40 percent and the rest of society, not just the poorest 10 percent, the OECD report said. Improvements and increasing access to public services like good education, training and healthcare, as well as cash transfers, are essential to generate greater equality of opportunities in the long run.

The report also found no evidence that redistributive policies such as taxes and social benefits harm economic growth, provided the policies are well designed and implemented.

Deutsche Welle

[For Swedish readers: Jesper Roine har en läsvärd post på ekonomistas om rapporten här (se även Finanspolitiska rådet här)]

11 Comments

  1. Like Krugman, I’m not convinced by this causality claim. Not just yet!!!!

  2. The only measure of inequality is income and this study did not address Piketty’s thesis. But, the main factor of inequality is the inheritance of private property: there is a difference between receiving one’s house as a gift upon marriage or one’s 21st birthday and paying down a mortgage or rent.

  3. I’m surprised that you believe in the results, when you reject the method. Care to explain?

    • “Believe” is a strong word. I find the analysis interesting, and, from a methodological point of view, neither better nor worse than similar econometric exercises in extending Solowian growth models. I guess Cingano is aware of this and therefore uses the phrasing “suggestive of” when presenting his results …

      • Well, you’re not very careful when using the title “OECD study shows inequality causes growth to slow”. No ambiguity there!

      • But I’m still curious: What makes this analysis “interesting”, while others, using very similar methodology are dismissed as “lacking sound ontological foundations”? It looks like cherry-picking to me.

        • It’s interesting for many reasons. One is that when I was teaching young economists like you in Lund 10-20 years ago, the textbooks’ standard view was that inequality and growth as a rule was positively related …

    • Here is one example which would support Piketty: a person has a 500,000 annuity which earns 9% interest per year, fairly reasonable. This person purchases a house at 4% interest for 300K. The annuity earnings easily covers the mortgage and this person lives, in effect, without any cost for the house. A similar example is the gifting of property to young person’s when they turn 21 or marry. In contrast, most lower middle class and working class never save enough to form an effective annuity/investment portfolio and there is no inheritance whatsoever, in fact, if a house is purchased, completing the mortgage and passing the property or equity is rare or a low frequency.

      Piketty’s claim that interest on investments is higher than increases in wages seems correct in the aggregate, but the practice of inheritance creates historical classes, very distinct starting points for large groups of persons.

  4. The report is thought-provoking and, by the general standards of such things, quite good. They do seem to trash the view that inequality still promotes growth, but do not seem to have studied time and other factors. In 18th C England a concentration of wealth seems to have kick-started growth, but the situation now may well be quite different.

  5. Isn’t it possible that the increase in income inequality is correlated with slower growth, in the way that both are caused by poor policies which leads to a wrong distribution of resources. Say regulation leading to monopolies, or lack of regulation for natural monopolies, or central banks continuous support and intervention for the benefit of the financial sector and theoretically long-term economic growth at the cost of low input prices for the industrial sector.

  6. There is an explaination for the different views on inequality in Michal Kaleckis “Political aspects of full employment”. Malecki wrote in 1943 that “It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.” If full employment is maintained for a long time: “… a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business — as a rule influential in government departments — would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending policy would again come into its own.”
    It seems probable that governement spending again has come into its own. At least among the authors of the mentioned OECD report.


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