Treating Inequality with Redistribution: Is the Cure Worse than the Disease?
Posted on February 26, 2014 by iMFdirect
By Jonathan D. Ostry and Andrew Berg
Rising income inequality looms high on the global policy agenda, reflecting not only fears of its pernicious social and political effects, (including questions about the consistency of extreme inequality with democratic governance), but also the economic implications. While positive incentives are surely needed to reward work and innovation, excessive inequality is likely to undercut growth, for example by undermining access to health and education, causing investment-reducing political and economic instability, and thwarting the social consensus required to adjust in the face of major shocks...
Looking at past experience, we find scant evidence that typical efforts to redistribute have on average had an adverse effect on growth. And faster and more durable growth seems to have followed the associated reduction in inequality.
Disentangling the effects of inequality and redistribution on growth...
And second, there is remarkably little evidence in the historical data used in our paper of adverse effects of fiscal redistribution on growth. The average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth. We find some mixed signs that very large redistributions may have direct negative effects on growth duration, such that the overall effect—including the positive effect on growth through lower inequality—is roughly growth-neutral...
The conclusion that emerges from the historical macroeconomic data used in this paper is that, on average across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes. And quite apart from ethical, political, or broader social considerations, the resulting equality seems to have helped support faster and more durable growth.To put it simply, we find little evidence of a “big tradeoff” between redistribution and growth. Inaction in the face of high inequality thus seems unlikely to be warranted in many cases.
http://ift.tt/1i83CJL
Posted on February 26, 2014 by iMFdirect
By Jonathan D. Ostry and Andrew Berg
Rising income inequality looms high on the global policy agenda, reflecting not only fears of its pernicious social and political effects, (including questions about the consistency of extreme inequality with democratic governance), but also the economic implications. While positive incentives are surely needed to reward work and innovation, excessive inequality is likely to undercut growth, for example by undermining access to health and education, causing investment-reducing political and economic instability, and thwarting the social consensus required to adjust in the face of major shocks...
Looking at past experience, we find scant evidence that typical efforts to redistribute have on average had an adverse effect on growth. And faster and more durable growth seems to have followed the associated reduction in inequality.
Disentangling the effects of inequality and redistribution on growth...
And second, there is remarkably little evidence in the historical data used in our paper of adverse effects of fiscal redistribution on growth. The average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth. We find some mixed signs that very large redistributions may have direct negative effects on growth duration, such that the overall effect—including the positive effect on growth through lower inequality—is roughly growth-neutral...
The conclusion that emerges from the historical macroeconomic data used in this paper is that, on average across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes. And quite apart from ethical, political, or broader social considerations, the resulting equality seems to have helped support faster and more durable growth.To put it simply, we find little evidence of a “big tradeoff” between redistribution and growth. Inaction in the face of high inequality thus seems unlikely to be warranted in many cases.
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