Inequality Hurts Economic Growth, for All of Us
by The Institute on December 09, 2014
It’s official, at least according to the OECD.
Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico, New Zealand, Sweden, Finland and Norway over the past two decades. In Italy, the United Kingdom and the United States, the cumulative growth rate would have been six to nine percentage points higher had income disparities not widened. On the other hand, greater equality helped increase GDP per capita in Spain, France and Ireland prior to the crisis.
It makes sense: if more and more wealth is concentrated in a smaller number of hands, then there is hardly likely to be sufficient collective spending power in the economy (what economists call “aggregate demand”) to generate rising prosperity for all. In fact, the current evolution of Capitalism is taking the world back to where it was in the early 20th century, before trade unions were strong enough to protect workers’ rights, before central governments were willing to mediate the class struggle and step in to make sure workers had the means to enjoy the material prosperity that the system generated, before wages growth allowed workers to share in productivity growth and build a modicum of material wealth. That is an ominous development as far as future growth prospects go if we are to take the conclusions of the OECD study seriously.
For those who would decry the traditional policy response of introducing some form of wealth redistribution via taxation, the OECD study has a ready response as well: The paper finds no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are well designed, targeted and implemented.
It’s hard to avoid the conclusion stressed by OECD Secretary-General, Angel Gurria: “Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”
