Michelle Kaeser: Debunking an income inequality myth

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      Income inequality has been the subject of a lot of elite chatter lately. The political and economic bigwigs are finally making it a point of focus. It was a central topic at the World Economic Forum in Davos this January. There was Obama’s State of the Union speech just a few days thereafter, in which he made inequality a dominant theme. Justin Trudeau seems to be designing his eventual campaign on his ability to resurrect the dying middle class. People are talking about the problem. But what’s to be done about it?

      Here’s the real trouble. It’s been a long-held assumption that taking measures to reduce inequality comes at that worst and most frightening of all economic costs: a negative impact on growth. Economists say that redistribution measures—we’re basically talking about taxes and transfers—are a drain on growth. They holler about how high taxes reduce the incentive to work. They scold that transfers like unemployment insurance encourage laziness and low productivity. Sometimes they argue over just how big the effect on growth is, but there’s been general agreement that the effect is negative. Redistribution hurts growth. That’s just true, they say.

      Only it’s not. In some of the most interesting economic news of the year so far, the IMF recently released a study that flipped this age-old bit of wisdom on its head. The study is the first that specifically examines the effect of taxes and transfers on growth by looking at inequality before and after these redistribution measures are imposed, for a spread of countries. And the conclusion? There is “surprisingly little evidence for the growth-destroying effects of fiscal redistribution”.

      This study largely builds on an earlier study put out by the IMF, which finds that inequality itself is strongly related to poor growth. Countries that have more equality also tend to have higher and more sustained levels of growth. Turns out, more equality is good for the economy. It’s good for growth! It’s good for business! It’s good for everyone! Leaving aside, then, the towering moral argument in favour of reducing inequality, there’s actually a strong economic incentive as well.

      Of course, there’s a limit to how much you can redistribute without eventually running into trouble. The new IMF study does point out that in cases of extreme redistribution, there can be an associated negative effect on growth, as was previously expected. But that’s only in the extreme cases. And even then, even in these extreme cases, the negative impact is generally offset by the positive effect of more equality in the economy. So it’s pretty much good news any way you look at it.

      Unsurprisingly, this study has everyone talking. Economists and columnists and bloggers at all the major news outlets have spent the last couple of weeks discussing the implications of the new research, and whether it signals the start of a shift in IMF policies toward ones more encouraging of efforts designed to tackle inequality.

      It’s great to see economic data support the morally obvious idea that things can’t continue the way they’ve been going. The growing divide between those laughing it up at the top and those crawling around on the bottom just isn’t sustainable. Obscene truths—for example, the fact that the richest 85 people on the planet own as much wealth as 3.5 billion others—are getting harder to swallow. This particular fact, this neat little bit of reality, is so deranged it’s almost scary to think about. And it’s actually pretty difficult to even conceive of properly, to really wrap your head around that level of disparity.

      Global inequality will probably always be worse, and harder to address, than the inequality within a given country. But we don’t need to spread our lens across the whole world to find real problems. We’ve got plenty to worry about here. Canada isn’t the absolute worst in terms of inequality. But it’s sort of close. The Conference Board of Canada put out a study that compares Canada to 16 peer nations. On this ranking of 17 countries—1st having the least inequality, 17th having the most—we come in at an unflattering 12th place. The U.S., of course, sits comfortably in spot 17, right there at the bottom. But we’ve got nothing to brag about here. Something needs to be done.

      Right now, we happen to be running full steam ahead into tax season, which is as good a time as any to give some thought to our redistribution policies. We can continue to argue over exactly which policies are most efficient and how best to implement them, but the IMF study at least offers a new dimension to the debate. And the discussion the study has prompted offers a fine opportunity to really consider how we feel about living in a developed country where some of us have more money than we could ever spend in a lifetime, while some of us struggle to eat. Somewhere in the tedious maze of bureaucratic misery that is the process of filing taxes, it might be worth taking a minute to look up from the T4 slips and Schedule 1 forms, gaze out a window, and indulge in some quiet reflection about life, the universe, and the purpose of our income redistribution policies.

      Comments

      4 Comments

      MD

      Mar 27, 2014 at 5:59pm

      "Economists say that redistribution measures—we’re basically talking about taxes and transfers—are a drain on growth. They holler about how high taxes reduce the incentive to work. They scold that transfers like unemployment insurance encourage laziness and low productivity."

      Neo-classicists probably will make these arguments, based on underlying circumstances, neo-Keynesians probably wouldnt, based on underlying circumstances.

      Your sweeping generalizaton of all economists as essentially neo-classicists is ideological claptrap, and you quite literally should know better, given your education.

      Nothing more than a Google search will deliver to your browser mountains of economic research, theory, and empirical evidence, from progressive and simply professional economists, to blow your generalizations clear to hell.

      The CCPA offices (and the CLC and most major Canadian national unions, and places like the Broadbent Institute, and Polaris Institute, and even Princeton and Harvard, amont others) are full of economists publicly arguing for the policies that you claim "economists" dont; they dont claim that "redistribution hurts growth" and that "is just the way it is".

      As a holder of an economics degree, how are you not embarassed by the generalizations in this article?

      I find it inconceivable that you simply are unaware of the easily verifiable facts I have raised.

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      Adam Gee

      Mar 28, 2014 at 12:30pm

      oh sssssnap!

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      Michael Castanaveras

      Mar 28, 2014 at 1:33pm

      Give her a break MD. She could have clarified (for your sake) by writing...

      "The only economists that politicians seem to listen to say that redistribution measures are a drain on growth."...or an equally overly wordy sentence.

      But the rest of us got where she was coming from.

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      Phil Dunlop

      Mar 28, 2014 at 4:11pm

      Seriously. Here in the real world, where we don't masturbate our brains with phrases like "ideological claptrap", there is a dogma that essentially boils down to "Growth good! Markets good! Taxes bad! Regulations bad! Poor people lazy! Welfare state bad!" and so on. The point and the significance of this article is that now the IMF -- the IMF, for Christ's sake; the patron saint of "structural adjustment"; the neoliberal Whore of Babylon herself -- is walking back some of the dogma. It's like Dick Cheney publicly expressing regret for waterboarding. It's the last thing you expect to happen.

      Masturbatory hair-splitting may play well in the seminar room, MD, but it's irrelevant here.

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