Jump to content
House Price Crash Forum
Sign in to follow this  
R K

Imf Study Finds Inequality Is Damaging To Growth

Recommended Posts

http://www.theguardian.com/business/2014/feb/26/imf-inequality-economic-growth?CMP=twt_gu

The International Monetary Fund has backed economists who argue that inequality is a drag on growth in a discussion paper that has also dismissed rightwing theories that efforts to redistribute incomes are self-defeating.

The Washington-based organisation, which advises governments on sustainable growth, said countries with high levels of inequality suffered lower growth than nations that distributed incomes more evenly.

Backing analysis by the Keynesian economist and Nobel prizewinner Joseph Stiglitz, it warned that inequality can also make growth more volatile and create the unstable conditions for a sudden slowdown in GDP growth.

And in what is likely to be viewed as its most controversial conclusion, the IMF said analysis of various efforts to redistribute incomes showed they had a neutral effect on GDP growth. This last point is expected to dismay rightwing politicians who argue that overcoming inequality robs the rich of incentives to invest and the poor of incentives to work and is counter-productive.

It added: "The IMF has debunked the old myth that redistribution is bad for growth and demolished the case for austerity. That redistribution efforts -essential to fight inequality- are good for growth is a welcome finding. Low tax and low public spending are clearly not the route to prosperity."

It is 18 months since the IMF published its controversial view that government cuts to public-sector spending were having a larger detrimental effect than previously thought. The paper, written by its chief economist, Olivier Blanchard, was incendiary and sparked denials in London and Brussels where calls for austerity were strongest.

Heated debate over Blanchard's analysis has continued ever since, with many economists claiming that assumptions used in the critique were flawed.

The authors of this latest report can expect the same backlash, especially in the US where the Tea Party has defended tax cuts for wealthy individuals and studies show most of the country's income growth since the crash has gone to the richest 1%.

Last year the UK's coalition government cut tax on incomes over £150,000 from 50p to 45p after a debate over the negative effects on growth of high taxes on wealthy individuals.

The French president, François Hollande, has come under severe criticism for raising the tax on incomes above €1m to 75% from business groups that claim it will hit GDP and discourage wealthy investors from staying in France.

The report's authors said the study, which excluded so-called market interference such as banker bonus caps and increases in welfare spending, showed the largest redistributions of income had negative effects on growth, but were offset by the benefits of lower inequality.

"We find that higher inequality seems to lower growth. Redistribution, in contrast, has a tiny and statistically insignificant (slightly negative) effect."

They said the traditional view that efforts to redistribute incomes would have a corresponding and most likely detrimental effect on growth was unfounded.

"Rather than a trade-off, the average result across the sample is a win-win situation, in which redistribution has an overall pro-growth effect, counting both potential negative direct effects and positive effects of the resulting lower inequality," they said.

In an interview later Ostry said it was his belief that the inclusion of higher welfare payments would only support the argument in favour of redistribution.

Poor Dave/Osborne/Boris. Wrong again.

Share this post


Link to post
Share on other sites

They're not wrong with what they're REALLY trying to do, just with what they SAY they're trying to do.

No, they're wrong in what they're really doing. What they SAY they are doing is helping "hard working families". What they're REALLY doing is increasing inequality exponentially. And they won't give a tinker's cuss that the IMF says it's bad for growth. It doesn't matter to them if the cake gets smaller, so long as the right people i.e. their sort, keep getting a bigger slice of it.

Share this post


Link to post
Share on other sites

Water's wet.

FFS it's not rocket science. Even rocket science isn't rocket science.

(I'm very sweary-mary today - apologies)

Agree!

No probs, have a G&T and watch Chelsea getting thumped.

Share this post


Link to post
Share on other sites

No, they're wrong in what they're really doing. What they SAY they are doing is helping "hard working families". What they're REALLY doing is increasing inequality exponentially. And they won't give a tinker's cuss that the IMF says it's bad for growth. It doesn't matter to them if the cake gets smaller, so long as the right people i.e. their sort, keep getting a bigger slice of it.

You misunderstood me - when I said they weren't wrong, I meant from their point of view. I agree that a return to the pre-1950s level of inequality is exactly their aim, the problem is that this aim is shared by all the political leaders, or at least by their paymasters.

Share this post


Link to post
Share on other sites

....erm.RAMPANT inequality stunts growth.

I don't have a problem at all with a little bit of inequality, that's life.

I still subscribe to my "orange-squash"-a-nomics.

...too highly concentrated is too sweet and rancid

too little concentration is zero flavour...and still rancid.

...somewhere in the middle seems to work.

Share this post


Link to post
Share on other sites

Didn't income equality help trigger the "great depression"?

That's... a controversial view. Can you clarify?

I suppose growing income equality might have been one of the outcomes of everyone, including the shoe-shine boy, piling into a bubble in stocks and shares. However, to then put the blame on income equality is a bit like describing disembowelling as a diet, and then deciding that losing weight is unhealthy despite being 10 stone over-weight.

Share this post


Link to post
Share on other sites

Here is a response to the paper

http://www.timworstall.com/2014/02/27/ritchie-on-the-imf-paper/

He takes a paper that says that modest action to remove glaring inequality is a pretty good idea and then uses it to insist that therefore we should reduce all inequality.

It’s worth noting that the database used in the paper does not include the Soviet block, either the USSR in the 1920s or Eastern Europe post WWII. You know, when very strong efforts were made to reduce inequality and these had something of an impact upon growth?

Share this post


Link to post
Share on other sites

Well, yes, but the issue isn't so much enforcing equality through intervention, but rather that recognising that the current interventions have increased inequality.

A truly free market isn't achievable IMHO, so it's a question of balancing the interventions appropriately.

Share this post


Link to post
Share on other sites

Well, yes, but the issue isn't so much enforcing equality through intervention, but rather that recognising that the current interventions have increased inequality.

Oy! What's this? Commonsense and basic truths in a socialist thread? Burn the heretic! :wacko:

Share this post


Link to post
Share on other sites

For decades the UK has kept on "growing" despite inequality increasing.

It depends what they mean by "growth". For the UK it's just meant more debt included in the growth figure - rather than real growth.

Edited by billybong

Share this post


Link to post
Share on other sites

For decades the UK has kept on "growing" despite inequality increasing.

It depends what they mean by "growth". For the UK it's just meant more debt included in the growth figure - rather than real growth.

Not when you strip out the credit expansion. It has in fact contracted.

Share this post


Link to post
Share on other sites

Not when you strip out the credit expansion. It has in fact contracted.

Very likely and it would be interesting to see figures for real growth excluding exceptional debt. Likely they would be rather shocking.

The point I'm making is that if they refer to growth it would be helpful if they made the distinction between different types of "growth" as otherwise the issue becomes blurred. They seem not to so it implies that the UK's economy is acceptable in that connection.

Edited by billybong

Share this post


Link to post
Share on other sites

The problem is the populous can see the big ticket items of life disappearing into the distance while working all hours, so why trade what life you have left for fiat funny money? Its not so much inequality rather the chance to even to aspire.

Share this post


Link to post
Share on other sites

The problem is the populous can see the big ticket items of life disappearing into the distance while working all hours, so why trade what life you have left for fiat funny money? Its not so much inequality rather the chance to even to aspire.

I disagree almost everything is easier to buy than it was 20+ years ago. E.g. tv, PVR etc etc.

Apart from a house of course but that is because the last few governments have decided that it is a good thing. If it weren't for that self inflicted problem then we would be a lot better off than in the past.

Share this post


Link to post
Share on other sites

That's... a controversial view. Can you clarify?

I suppose growing income equality might have been one of the outcomes of everyone, including the shoe-shine boy, piling into a bubble in stocks and shares. However, to then put the blame on income equality is a bit like describing disembowelling as a diet, and then deciding that losing weight is unhealthy despite being 10 stone over-weight.

It would be more correct to say policy and societal choices taken to specifically increase inequality (for example lowering top end tax rates and promulgating the "wealth creator meme), result in setting economic forces in motion that cause great depressions. Marriner S. Eccles, chairmen of the Fed during the great depression put it better than I ever could. Notably he was also the grand architect of the U.S post-war new-deal system that was depression free - until it was pretty much dismantled between 1975-2000 - after which we have promptly entered a new great depression.

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.]

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

Share this post


Link to post
Share on other sites

Of course Inequality is a drag on growth........when something is beyond reach what is the point in wasting energy and time aspiring to achieve the impossible......the below equals will make their own exchanges and do business amongst themselves to survive, nature sees that it happens that way. ;)

Share this post


Link to post
Share on other sites

It would be more correct to say policy and societal choices taken to specifically increase inequality (for example lowering top end tax rates and promulgating the "wealth creator meme), result in setting economic forces in motion that cause great depressions. Marriner S. Eccles, chairmen of the Fed during the great depression put it better than I ever could. Notably he was also the grand architect of the U.S post-war new-deal system that was depression free - until it was pretty much dismantled between 1975-2000 - after which we have promptly entered a new great depression.

InterestRateRipOff, in the light of alexw's post above, are you able to clarify what you mean?

Share this post


Link to post
Share on other sites

Honestly, you don't do yourself any favours quoting Tim Worstall, calling him a 2nd rate economist would be an insult to all 3rd rate economists.

For example he suggests utilizing data from the soviets command and control economic system, in the belief that its somehow applicable to what occurs in capitalist systems where market signals can operate. Complete nonsense. The soviet system was so utterly different it would be like saying Earth is a planet, Mars is a planet therefore we can breathe the atmosphere on Mars.

Share this post


Link to post
Share on other sites

Oy! What's this? Commonsense and basic truths in a socialist thread? Burn the heretic! :wacko:

Inequality complainers, and wage inflation desirers, I find are usually the same ones trying to convince me little boxy houses aren't bad value at quarter million pounds. Older property winners.

The austerity process is going to make it harder for younger people to afford houses, meet rental thresholds, which threaten over time the silly prices older owners think their homes are worth.

The calls for redistribution, wanting to spend other people's savings, and thinking Gov can rack up and spend with endless debt. UK the world's consuming champions.

The last depression (1930s) reduced the inequality of wealth. The tumble in the stock market and the losses from repudiated foreign bonds were borne almost entirely by the wealthy. Furthermore the wealthy owned a larger percentage of the nation's real estate in 1929. However the coming depression may increase inequality rather than reduce it because the lion's share of the losses may come in real estate, which has been bid up to fantastic heights. The middle class have the largest proportion of their assets in real estate.

Deflation raises the value of financial assets relative to tangible assets. The rich are therefore likely to gain proportionately for the not very mysterious reason, as a group, they have a greater proportion of their wealth in financial assets. On average the top 10 percent of income earners have only about 15 percent of their assets in housing, as opposed to over 50 percent for the middle class. 55 percent of American families have negative financial assets.

You will hear more about it in the months and years to come. Before long, half the people you meet will have it in the back of their heads that, if a depression begins, it was because of the inequality of wealth.

Edited by Venger

Share this post


Link to post
Share on other sites

Inequality complainers, and wage inflation desirers, I find are usually the same ones trying to convince me little boxy houses aren't bad value at quarter million pounds.

A rather arbitrary conflation IMHO. Do you think the current distribution of wealth is a natural occurrence? Do you think it's healthy for capitalism to have such a skewed distribution?

Share this post


Link to post
Share on other sites

A rather arbitrary conflation IMHO. Do you think the current distribution of wealth is a natural occurrence? Do you think it's healthy for capitalism to have such a skewed distribution?

There is way too much wealth concentration in asset value of homes of older people. I'm positioned to take advantage of lower values, and home-owners want to lock in their gains.

However no; so much wealth has been acquired, it seems, from interventions by authorities (including older home-owners), and perverse risk taking incentives that were eagerly seized - which has also harmed more prudent savers.

Inequality of wealth, per se, is not necessarily a negative for economic growth. Where the poor have a low propensity to save, inequality of income is essential for economic growth. A growing disparity of assets is sometimes a sign of rapid progress. It spurs people with little income to adjust their behaviour and values in imitation of those who succeed. Inequality exploded during the takeoff phases of industrialisation. This did not stifle growth. The compound growth rate of some economies in the nineteenth century, when inequality was high, exceeded that of during the twentieth century, when inequality of wealth generally lower.

Rising inequality may also be a sign of a society in decline. The burdens of higher taxes fall hardest on the poor - even if the rich pay the lion's share. As Playfair observed long ago, "Long before a country is as highly taxed as the majority of its inhabitants will bear, those who are the least able to pay are crushed, and reduced to absolute poverty."

Everyone is better off, rich and poor alike, when total wealth rises.

Edited by Venger

Share this post


Link to post
Share on other sites

There is way too much wealth concentration in asset value of homes of older people. I'm positioned to take advantage of lower values, and home-owners want to lock in their gains.

However no; so much wealth has been acquired, it seems, from interventions by authorities (including older home-owners), and perverse risk taking incentives that were eagerly seized - which has also harmed more prudent savers.

TBH I'm not too concerned about home-owners 'wealth'. More accurately, they've been accidental beneficiaries of policies designed to protect general asset prices, and they will be protected for only as long as those interests remain aligned (although it's also a win-win for the government, given that voters traditionally don't react well to HPCs - and even there, the tide is turning).

That aside, whilst I understand both your hope and your position, do you really think it's going to be business as usual when and if this sucker goes down?

If this ship does hit the ice-berg, the smart money will be in the life-boats; meanwhile, the politicians will carry on arranging the deck chairs and you'll be asking for a cabin-upgrade...

Edited by tomandlu

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   206 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.