Must-Read: Ryan Avent: Inequality and Growth

Must-Read: Ryan Avent: The Economist explains: How inequality Affects Growth: “INEQUALITY sits at the top of the political agenda…

…On June 15th economists at the IMF released a study assessing the causes and consequences of rising inequality…. Governments should be especially concerned about its effects on growth. They estimate that a one percentage point increase in the income share of the top 20% will drag down growth by 0.08 percentage points over five years, while a rise in the income share of the bottom 20% actually boosts growth…. Inequality could impair growth if those with low incomes suffer poor health and low productivity as a result, or if, as evidence suggests, the poor struggle to finance investments in education. Inequality could also threaten public confidence in growth-boosting policies…. Inequality could lead to economic or financial instability…. In moderation, redistribution seems to have benign effects—perhaps by reducing dependence on risky borrowing among poorer households. Over the past generation or two inequality has risen most in places where progressive policies, such as high top tax-rates, have been weakened. A little more redistribution now might improve the quality and quantity of economic growth—and reduce the demand for more aggressive state interventions later.