Social Policy in Ontario

This indifference is grounded in a proposition that has for decades dominated American debate over redistributive policies like steeper taxes for the rich: that inequality is an expected outcome of economic growth, and that efforts to tamp down inequality would slow growth down. As President Obama said in his speech in Kansas last week, this strain of thought goes back to at least the turn of the last century when “there were people who thought massive inequality and exploitation of people was just the price you pay for progress.”

Why, conservatives ask, would people exert themselves, study more and work harder if they could not reap extra rewards from the effort? Trying to fix inequities would only blunt incentives to work and invest. As Mr. Gingrich put it, “You are not going to get job creation when you engage in class warfare because you have to attack the very people you hope will create jobs.”

This argument is — at best — incomplete. Some inequality may be necessary to encourage investment for growth. But as recent research shows, intense inequality actually stunts growth, making it more difficult for countries to sustain the sort of long economic expansions that have characterized the more prosperous nations of the world.

The first chart, based on research by Andrew Berg and Jonathan Ostry, economists at the International Monetary Fund, reveals the link between inequality and the sustainability of economic growth. Igniting growth is easier than maintaining it. They found that in high-inequality nations spurts of growth ended more quickly, and often in painful contractions.

The chart reports inequality with the so-called Gini index, which is 0 when all households have the same income and 100 when all the income goes to only one household. It shows that regions with high inequality, like sub-Saharan Africa and Latin America, have recorded shorter periods of sustained economic growth since 1950 than regions with lower inequality like East Asia. The average stretch of robust growth among relatively equitable industrial countries lasted more than 24 years. In Africa the average was less than 14 years.

The economists found that income distribution contributes more to the sustainability of economic growth than does the quality of a country’s political institutions, its foreign debt and openness to trade, the level of foreign investment in the economy and whether its exchange rate is competitive.

It’s not too hard to see why. Extreme inequality blocks opportunity for the poor. It can breed resentment and political instability — discouraging investment — and lead to political polarization and gridlock, splitting the political system into haves and have-nots. And it can make it harder for governments to address economic imbalances and brewing crises.

Republicans might be tempted to dismiss such analysis as irrelevant to the United States, which is already highly developed. But as the second chart shows, inequality in Americahas soared over the last 30 years, approaching and even surpassing that in many poor countries. Today, America is an outlier among industrial nations. Its distribution of income looks closer to that of Argentina than, say, Germany.

So it is perhaps unsurprising that our recent economic crisis had some characteristics of boom-and-busts in less developed nations. It was triggered, in part, by 1 percenters on Wall Street persuading regulators to remove restrictions on their casino. It led workers to pile on debt to supplement falling incomes. It ended with a vast deployment of tax dollars to bail out fallen plutocrats. And our political system seems unable to deal with the aftermath.

< http://www.nytimes.com/2011/12/11/opinion/sunday/the-1-percent-clubs-misguided-protectors.html?_r=1&ref=editorials >

Chart 1: Fairness Means More Growth

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Chart 2: Top Earners Compared

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