The debate over the legitimacy of powerful elites seizing a bigger share of the national income and wealth pie year after year has been gaining prominence in the public conversation. Mark Zuckerberg himself—one of the wealthiest men in the world—remarked that “today, we have a level of wealth inequality that hurts everyone” during his recent speech at Harvard University after receiving an honorary degree.

Researchers and scholars have also begun to clearly break the recurrent classic dichotomy between equity and efficiency pervading conventional economic theory, which led to the neglect of distributional issues for many decades. More broadly, the idea that the understanding of economic inequality “assists our understanding of various fields of economics”1 is now put at the forefront. A clear example of this paradigm change is the realization that transmission mechanisms of monetary policy may be substantially affected by distribution considerations.2

The recent 2007–2008 collapse of the global financial system naturally acted as a catalyst for growing concerns around the increasing dispersion of economic resources within most advanced economies. Subsequently, the landmark book by Thomas Piketty, Capital in the Twenty-First Century, underlined very clearly the risk of the rising importance of inherited intergenerational advantages in transforming our societies into patrimonial capitalistic economies dominated by wealthy dynasties. Yet the main argument of the book rests on how wealth inequality evolution over time may be affected by macroeconomic circumstances—namely by the difference between the average return to capital and the rate of growth of the economy.3 The reverse direction of inquiry—how macroeconomic performance may be affected by the extent of inequality—rests instead outside the scope of Piketty’s analysis and modeling.

A review on the inequality-macroeconomics nexus

The idea that inequality may be one of the factors affecting macroeconomic performance and financial stability is the object of inquiry of a chapter that I wrote in the newly published book After Piketty: The Agenda for Economics and Inequality.4

In fact, the investigation of the (fairly complex) relationship between inequality and economic growth has been featured prominently in the empirical literature on inequality, with disparate findings and hypotheses pointing in different directions. Theoretically speaking, this should be expected, as, on the one hand, income and wealth dispersion stemming from differences in effort, productivity, and risk attitude are a fundamental prerequisite for investment and innovation incentives. On the other hand, high levels of economic inequality can, through a variety of channels—consumption, investment in physical and human capital, or rent-seeking behavior—negatively affect economic growth.

As more and more reliable data became available to researchers, the subject has fallen again under active empirical scrutiny. In fact, a growing body of empirical evidence is now suggesting that the idea that a fairer distribution of economic resources damages economic growth is clearly not supported by the available data.5

Why would economic growth benefit from a fairer distribution of resources?

Economic theory provides different anchors as to why the so-called equity-efficiency trade-off may fall apart.

First, if most of the dispersion of economic outcomes of individuals results from inequality of opportunities—in other words, from circumstances outside their own control such as family background, race, and gender—the potential and aspirations of individuals can be constrained, the allocation of resources may be distorted as economic opportunities are not necessarily given to the most talented but to individuals with predetermined circumstances, and economic growth may in turn be weakened.

Second, high levels of income and wealth inequality, in combination with imperfection of both capital and insurance markets, may be detrimental to the level of economic activity as only those who inherit sufficiently high wealth may be able to pay the fixed cost of entrepreneurial activity or education, becoming more productive and better-paid skilled workers.6 This is detrimental, as education may be precluded to people with the highest possible marginal gain from education and if we believe that entrepreneurial skills are randomly distributed and not themselves acquired dynastically in house/firm.

Third, investments in productive capital and risky activities themselves can also be discouraged by highly unequal distribution of resources as a result of increasing rent-seeking behavior and other expropriation actions, which can be undertaken by the government or relatively poor or rich people alike (depending on the specific political economy model we have in mind). In particular, the expropriation may be perpetrated by wealthy elites even in our modern advanced economies via “subverting legal, political and regulatory institutions to work in their favour,” further increasing their level of wealth.7

But does wealth inequality really promote rent-seeking behavior? A recent work by Bonica and Rosenthal documented the U.S. campaign contributions of the Forbes 400 wealthiest individuals between 1982 and 2012. Their figures imply an average individual donation of $10,000 for each $1 million increase in wealth—presumably a relatively easy achievement for a billionaire.8 The high degree of political activism of wealthy Americans also features in research by Page, Bartels, and Seawright showing that almost half of very wealthy respondents of a survey conducted in the metropolitan area of Chicago made at least one contact with a congressional office within the previous six months of the interview. Moreover, about half of the contacts that could be coded “acknowledged a focus on fairly narrow economic self-interest.”9 Unsurprisingly, the latter does not always coincide with the overall general interest. In line with this framework, a recent work by Bagchi and Svejnar documented a negative relationship between wealth inequality and economic growth in those countries where the extent of wealth inequality is mainly ascribed to “political connections”.10

Going beyond economic growth

Economic growth is certainly one important aspect of macroeconomic performance. However, other features of the growth process and macroeconomic performance may be relevant too. For instance, the volatility of the growth path, the sustainability of economic growth, the resilience of the economy to a shock, the duration of economic recessions, and the incidence of financial imbalance and instability can all be very important characteristics of macroeconomic performance that are worth exploring. These issues are treated in turn below.

Is inequality leading to volatile aggregate performance and to short-lived growth?

Research by the IMF certainly does not reject these hypotheses. On the one hand, countries with higher income inequality appear not to be able to sustain GDP growth for long once it started.11 On the other hand, 70 percent of changes in U.S. consumption during the decade from 2003 to 2013 was found to be associated to the behavior of individuals in the top decile of the income distribution.12 Indeed, these numbers suggest, as remarked by Robert Frank, that “America’s dependence on the rich plus great volatility among the rich equals a more volatile America.”13 The influential work by Mian and Sufi suggested instead that poorer U.S. households (highly leveraged and with high marginal propensity to consume) took the largest hit from the drop in post-2007 U.S. house prices and therefore were responsible for the large drop in aggregate consumption and subsequent employment losses.14 At a first glance, the two ideas may appear at odds with each other but they can perhaps be reconciled if seen as different sides of the same inequality coin.

Are recessions in more unequal countries deeper and do they last longer?

Support for the idea that income inequality can retard full economic recovery following recessions is found in studies for the case of the United States, both at the aggregate level and at a state level.15 In addition, an earlier cross-country study by Rodrik highlighted how countries with greater social cleavages and weaker institutions experienced the sharpest drops in GDP growth from 1975 to the late 1980s (a highly turbulent period from the macroeconomic point of view)—the idea being that policies implemented in response to an external shock usually carry substantial distributional implications, while the latent social conflict and high social division (“along the lines of wealth, ethnic identity, geographical region or other divisions”) that permeates the economy may delay their implementation and lead to “macroeconomic mismanagement.” It is reasonable to assume that each independent group would seek to bargain a lower burden of a negative shock and the share of resources devoted to counterproductive rent-seeking activities increases.16 As a result, the magnitude of the collapse of growth due to external shocks can be higher, and the resilience of the economy to external shocks can be damaged.

Is inequality leading to financial instability or the accumulation of financial imbalances?

A number of theoretical considerations have been put forward to suggest that the degree of inequality can have a direct effect on aggregate savings and consumption and on both demand for and a supply of credit. Relative income and spending comparisons may, for instance, have important influence on what people spend their money on, how much they save, and even how much debt they accumulate.

Empirical findings are so far controversial: Research based on aggregate data and cross-country analysis emphasize positive correlations between inequality, household overconsumption, and indebtedness, whereas the evidence based on microdata appears less consistent and supportive of this hypothesis. Similarly, little evidence was found in support of the idea that rising inequality may increase the probability of a financial crises to occur.17 Yet further investigation of the alleged relationship between inequality and private debt becomes particularly relevant, as the latest crisis was largely the result of the burst of a debt-financed housing and consumption bubble that involved the private sector of the economy.

Growing inequality does not benefit the macroeconomy

After surveying a growing body of new and old evidence on inequality and the macroeconomy, one would easily conclude that increasing income and wealth inequality appear to be sanding the wheels of economic growth, making the ride bumpier, with short ups and deep downs, and potentially increasing the risk of a fatal crash. This may generate an instrumental justification for effective coordinated actions by governments to reduce income and wealth inequality that goes beyond classic concerns about distributional equity and fairness.

At the same time, as I recalled in the chapter from which this article draws on, “no relationships have been robustly demonstrated without qualification.” Furthermore, because establishing a causal relationship even when the empirical association is confirmed is an extremely tricky business, it is imperative to conduct fresh empirical research, also outside the United States, to corroborate some of the empirical findings discussed above, test new hypotheses, and enrich our scientific knowledge to better inform policies. Most importantly, the understanding of the determinants of economic inequality is fundamental to substantiate, case by case, the inevitable contingent nature of the relationship between aggregate performances and inequality. This would caution everyone from the adoption of a new generic consensus on the detrimental effects of inequality on economic stability that “is as likely to mislead as the old one was.”18

If anything, we can now confidently stop justifying increasing inequalities in income and wealth on mere economic grounds.

Reducing inequality, the constraints on substantial freedom and opportunities of individuals, will not frustrate, but possibly will enhance the path of economic prosperity and stability; it is a gain that every democratic society must strive for.

Salvatore Morelli is a visiting scholar at the Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, and associate member of Nuffield College at Oxford as well as a research associate at the Center for the Study of Economics and Finance (CSEF).

  1. Anthony Atkinson and Francois Bourguignon, “Introduction.” In Anthony Atknison and Francois Bourguignon, eds., Handbook of Income Distribution Vol. 1 (North Holland: Elsevier, 2000, p.4).
  2. Adrien Auclert, “Monetary Policy and the Redistribution Channel.” Working Paper (National Bureau of Economic Research, 2017).
  3. Thomas Piketty, Capital in the Twenty-First Century (Cambridge: Belknap Press of Harvard University Press, 2014). In relation to this point, Piketty writes, “In a sense, it sums up the overall logic of my conclusions” (p.25).
  4. This article builds on Salvatore Morelli, “Rising Inequality and Economic Instability.” In Heather Boushey, Brad DeLong, and Marshall Steinbaum, eds., After Piketty: The Agenda for Economics and Inequality (Cambridge: Harvard University Press, 2016). I would like to thank Marco Ranaldi for his comments on a draft of this article.
  5. See the extensive discussion of the literature, as well as the empirical findings, in Francisco H. G. Ferreira and others, “Inequality of Opportunity and Economic Growth: A Cross-Country Analysis.” Working Paper 6915 (World Bank Policy Research, 2017).
  6. Oded Galor and Joseph Zeira, “Income Distribution and Macroeconomics,” Review of Economic Studies 60 (1) (1993): 35–52.
  7. Edward Glaeser, Jose Scheinkman, and Andre Shleifer, “The Injustice of Inequality,” Journal of Monetary Economics 50 (1) (2003): 199–222, at 200.
  8. Adam Bonica and Howard Rosenthal, “The Wealth Elasticity of Political Contributions by the Forbes 400” (2015), available at
  9. Benjamin I. Page, Larry M. Bartels, and Jason Seawright, “Democracy and the Policy Preferences of Wealthy Americans,” Perspectives on Politics 11 (1) (2013): 51–73.
  10. Sutirtha Bagchi and Jan Svejnar, “Does Wealth Inequality Matter for Growth? The Effect of Billionaire Wealth, Income Distribution, and Poverty,” Journal of Comparative Economics 43 (3) (2015): 505–530.
  11. Andrew Berg, Jonathan D. Ostry, and Jeromin Zettelmeyer, “What Makes Growth Sustained?,” Journal of Development Economics 98 (2) (2012): 149–166.
  12. Bas B. Bakker and Joshua Felman, “The Rich and the Great Recession.” Working Paper 14/225 (International Monetary Fund, 2014).
  13. Robert Frank, The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust (New York: Random House, 2011).
  14. Atif Mian and Amir Sufi, House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again (Chicago: University of Chicago Press, 2014).
  15. Barry Z. Cynamon and Steven M. Fazzari, “Inequality, the Great Recession and Slow Recovery,” Cambridge Journal of Economics 5 (2015); Timothy Neal, “Essays on Panel Econometrics and the Distribution of Income” (Ph.D. thesis, University of New South Wales, 2016).
  16. Dani Rodrik, “Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses,” Journal of Economic Growth 4 (4) (1999): 385–412.
  17. For a general overview of these hypotheses, see Salvatore Morelli and Anthony B. Atkinson, “Inequality and Crises Revisited,” Economia Politica 32 (1) (2015): 31–51.
  18. Dani Rodrik, “Good and Bad Inequality,” Project Syndicate, December 11, 2014, available at