Afternoon Must-Read: Inequality and Growth: What I Think We Know and Don’t Know

Jared Bernstein: Inequality and Growth: What I Think We Know and Don’t Know “This new S&P study on inequality and growth…

…is creating a bit a buzz, mostly because it’s from a firm we associate with financial markets, not inequality analysis…. Though in an earlier study I raised some questions about the claim that high inequality dampens growth, I clearly think there’s something there, especially as regards mobility barriers…. What follows is my brief overview of the basic channels by which economists think inequality hurts growth…. Ours is a 70% consumer spending economy…. Evidence: This is a solid theory but the evidence is weaker than you’d expect…. Our historically high levels of inequality threaten to undermine both parents’ and society’s ability to invest…. Evidence: Again, solid theory but not a lot of proof…. Regressive tax and transfer policies…. Evidence: This is a well-known development and it makes sense…. But how is this a drag on macroeconomic growth? S&P doesn’t say and it’s not obvious….. Leverage, bubbles, and busts: OTEers know that I think this one is big. The chain of events is simple and empirically plausible…. Evidence: I found this paper by Cynamon and Fazzari to be the most systematic and compelling analysis…. Money in politics… my other top candidate…. Evidence: The linkages here include dysfunctional politics that hurt growth in obvious and visible ways from government shutdowns, under-regulation of financial markets, threats to default, and underinvestment in public goods, from medical research to transportation to education…. So that’s the skinny on what I think we know…