Redistribution, Inequality, and Growth

In the absence of an economist among us so far, I'm talking on something which I really don't know beyond the limit of common sense, or rather sharing what I think is true. We, all members of Kakching Thinks should conduct a manhunt for at least an economist or two.

Late last month (February) the International Monetary Fund (IMF)  published some important points thrown up in one of its staff discussions, prepared as a paper by its Research Department scholars. The paper, Redistribution, Inequality, and Growth,finds extreme income inequality harmful for the pace and sustainability of economic growth. It also makes the case that redistribution efforts—including progressive taxation tax and spending on health and education—are pro-growth.

As soon as the paper was published, Oxfam (it says "one person in three in the world lives in poverty", and this organization is "determined to change that world by mobilizing the power of people against poverty") said it agrees with the IMF on the paper.

The IMF report says:

“It would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable.” (page 25).
“The combined effects of redistribution are on average pro-growth” (page 4).

Further, a recent report by Oxfam found that almost half the world’s wealth is owned by one percent of the population and that the bottom half of the world’s population owns the same wealth as the richest 85 people in the world.

Along the same line the Atlantic observes:

Inequality is a choice, but it's not one we have to make to grow.

That might sound obvious, but isn't to economists. Most of them think there has to be a trade-off between equality and efficiency. That taxing the rich to give to the poor has to slow the economy down. Because rich and poor alike will have less incentive to work, so they won't.

But, as you may have noticed, the world doesn't always work the way economists think it has to.

Further Atlantic summarized (3 March 2014) major points in the IMF paper as:

1. If two countries have the same amount of redistribution, the one with more inequality will tend to grow less. Specifically, moving from the 50th to the 60th percentiles for inequality will knock 0.5 percentage points off of per capita growth a year.

2. If two countries have the same amount of inequality, the one with more redistribution will not tend to grow any less—at least not in a statistically significant way.

3. But this doesn't tell us the whole story about redistribution and growth. That's because redistribution doesn't keep inequality constant; it reduces inequality. So what we really want to do is add these two together, to see the combined effects of less inequality and more redistribution on growth. Since the former helps growth and the latter doesn't hurt it that means that redistribution overall tends to increase growth.

4. How long an economy grows, though, can be more important than how much it does. As the researchers point out, growth isn't some linear process. It comes in fits and starts, and it can be hard to restart after a fit. The question then is what inequality and redistribution do to how long a "growth spell" lasts. The answer: pretty much the same thing they do to how much growth there is.

5. The more inequality there is, the greater the chance that a growth spell will end the next year. The researchers found that every point the Gini index goes up makes growth six percent more likely to stop soon.

6. Redistribution has a more complicated relationship with growth spells. It doesn't affect how long the economy grows when it's low. But it does make the economy less likely to keep growing when it's high, in the top 25 percent. You can see just how high is high in the blue dots below. The countries with the most post-tax equality—and redistribution—tend to be the most unequal pre-tax. In other words inequality is always and everywhere a political phenomenon. It's a choice.

7. But, as I said before, it's a choice we don't have to make. Redistribution overall helps, and at least doesn't harm, growth spells. That's because the positive effects of less inequality add to or offset the negligible, or negative, effects of redistribution itself. When redistribution is in the bottom 75 percent, these positive effects are the only ones, and growth lasts longer. And when redistribution is in the top 25 percent, these positive effects make up for the negative ones from taxing-and-transferring so much—it's a statistically insignificant wash.

Now countries can now think only of its economy in isolation. In the same way no village or small town can think of its economy in isolation. All are interrelated. The world's inequality affects Manipur, and Kakching for that matter. The world economy is not an individual's act, but every individual takes part in it. Yes, some play more, some less--please refer to the "richest 85 people in the world" reference above; however, there are always things we can do on a small scale, in our families, localities, in our villages, towns and cities. Each small unit should resits "unjust" inequality, then we don't contribute to the injustice of a large scale inequality. The rich also should exercise kindness (if they have any drops of it), give it where it is to be shown.