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Per Obama, Does Income Inequality Retard Growth?



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In President Obama’s thinly veiled campaign speech last week, he continually emphasized his plans to promote a vision of a more equal America, and suggested that Republican proposals will increase our country’s inequalities. He claimed that, beyond questions of fairness, “research has shown that countries with less inequality tend to have stronger and steadier economic growth over the long run.”

The preponderance of evidence suggests that there is no such relationship, at least not in a country like the United States. Barack Obama may believe in a more equal society, but research suggests that economic growth is no reason to promote it.

Scott Winship of Brookings, who has researched and written extensively on income inequality, points to one IMF paper which vaguely supports the administration’s contention, concluding that there is a link between more income equality and longer lasting periods of economic growth. As Winship explains, “I’m pretty sure that if pressed, the administration would cite the IMF paper. The ‘stronger and steadier’ . . . gives it away.” However, Winship notes that the IMF paper “focuses on a very broad set of countries, including lots of developing countries, so I’d argue it’s not that relevant for developed countries.”

Indeed, the conclusions of the paper seem to rely primarily on developing countries where the dynamics are thoroughly irrelevant to America. For instance, in a case examination, the paper cites Cameroon, Guatemala, Colombia, Ecuador, Panama, and Nigeria as examples of societies where inequality can, for a variety of reasons, truncate economic growth.

Furthermore, while President Obama clearly chose his words (“stronger and steadier”) carefully, even his best evidence here only points to sustained economic growth, with fewer shocks and troughs, rather than simply better growth over time.

#more#Winship points to a much more relevant study that finds no significant relationship between economic growth and income inequality, among a proper sample (twelve wealthy nations) and the proper time series (the 20th century). In fact, an increase in the top decile’s income correlates with slightly stronger economic growth.

There has also been a wide range of research suggesting that greater income equality is correlated with better health outcomes, happier societies, and other social benefits, most famously in The Spirit Level: Why Greater Equality Makes Societies Stronger, released a couple years ago to wide acclaim. There’s still much dispute over this: The Spirit Level in particular has been accused of arbitrarily choosing its sample (though admittedly, they did focus on wealthy nations) and sloppy methodology. Often, the argument doesn’t go beyond a linear regression between a certain health outcome and income equality, which is, of course, not sufficient to prove causation — and doesn’t begin to explain the president’s assertion of overwhelming economic evidence for inequality.

There are a number of reasons why research that includes developing countries suggests that inequality harms economic growth, but one of the more prominent ones has been suggested by Alesina and Rodrik, and might amuse some American conservative observers. They find that greater income inequality causes economic stagnation not directly, but because it causes the government to resort to economic policies that redistribute wealth and support an extractive state.

Sound familiar? Now, of course, President Obama’s policies can’t quite be compared to those of an extractive dirigiste developing nation, but it’s a concept worth noting.



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