17 June 2015
The report, Causes and Consequences of Income Inequality: A Global Perspective, states: "If the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth." In short, making the rich richer at the expense of the poor is not only bad for the poor, it is bad for everybody. And conversely, making the poor richer is good for everybody.
The latter is not surprising. The poor spend every penny they get, they spend it now, and they spend it locally, where it does the most good. Consumption is, after all, the main driver of the economy.
The report suggests that as the income share of the rich increases, so does their political influence, which leads to policies that favour them. Less is spent on policies that would benefit the poor such as better schools and cheaper university education, policies that would lead to increased GDP and a better life for all. Inequality leads to more inequality. According to the report, "Widening income inequality is the defining challenge of our time."
Actually, climate change is the defining challenge of our time, but inequality runs a good second, and if economists at the staunch free market-oriented IMF want to give it pride of place, I won't quibble.
Posted by Bill Longstaff at 6:27 pm