Thought of the Day on debating Inequality

This exchange between a Democrat and a CEO should shape the 2020 campaigns

For Discussion: Comment on the following quote and how can we make more sense in talking about inequality.

Over the past decade, however, the research staff of the IMF has done — even in the eyes of its critics such as Oxfam — fundamental work on the costs and causes of inequality and on what can be done to cure excessive inequality. This book draws on this academic research, explaining it in such a way that the key findings can be understood by a broader audience.

There are three important results from our work. The first, the one cited by Obama, is that inequality in incomes is harmful for sustained economic growth. There has been much anguish expressed over inequality in recent years: some find extreme inequality morally repugnant, others worry about the social costs or about political capture by elites — that is, attempts to use their wealth to change rules and regulations in their favor. We do not deny the importance of these reasons to worry about inequality. Our finding of a direct economic cost provides an additional powerful reason to be concerned about inequality.

Second, virtually every policy touted by mainstream economists to raise average incomes also has an impact on inequality: it generates winners and losers within countries. Hence, economic policies pose what economists refer to in their jargon as a trade-off between efficiency and equity. Governments have to balance the efficiency gains of making the average person better off with the equity costs of increasing income gaps between the rich and the poor. Our first finding adds a double whammy: the increase in inequality from economic policies can itself detract from durable growth, the very thing that economic policies are trying to foster in the first place. The overall message is not that pro-growth policies should not be pursued, but rather that governments should take steps to redress the policies’ impact on the distribution of income. One way is to design economic policies so that the distributional impacts are tempered in the first place. Another remedy is redistribution: using taxes and transfers to redistribute income from the rich to the poor.

Our third finding is that the economic costs of redressing excessive inequality through such redistribution are not necessarily high. There is often a fear that using redistribution to redress inequality may itself cause substantial harm to economic growth — “the cure may be worse than the disease” — because it lowers incentives to work hard. This fear turns out to be misplaced. This book will present evidence showing that redistribution, unless extreme, does not hurt economic growth. It can thus be a win-win policy in many cases: it helps equity without much (or any) adverse impact on efficiency.

Ostry, Jonathan D.. Confronting Inequality