On Thursday, Paul Krugman wrote that evidence is mounting to support the notion that inequality can sabotage a market economy. There will always be some inequality in market economies. But gross inequality is a drag on economic growth:
It’s true that market economies need a certain amount of inequality to function. But American inequality has become so extreme that it’s inflicting a lot of economic damage. And this, in turn, implies that redistribution — that is, taxing the rich and helping the poor — may well raise, not lower, the economy’s growth rate.
Neo-Conservatives, of course, believe redistribution is immoral. However:
Earlier this week, the new view about inequality and growth got a boost from Standard & Poor’s, the rating agency, which put out a report supporting the view that high inequality is a drag on growth. The agency was summarizing other people’s work, not doing research of its own, and you don’t need to take its judgment as gospel (remember its ludicrous downgrade of United States debt). What S.& P.’s imprimatur shows, however, is just how mainstream the new view of inequality has become. There is, at this point, no reason to believe that comforting the comfortable and afflicting the afflicted is good for growth, and good reason to believe the opposite.
And the IMF has reached the same conclusion:
Specifically, if you look systematically at the international evidence on inequality, redistribution, and growth — which is what researchers at the I.M.F. did — you find that lower levels of inequality are associated with faster, not slower, growth. Furthermore, income redistribution at the levels typical of advanced countries (with the United States doing much less than average) is “robustly associated with higher and more durable growth.” That is, there’s no evidence that making the rich richer enriches the nation as a whole, but there’s strong evidence of benefits from making the poor less poor.
Krugman cites Food Stamps -- the bugbear of conservatives -- as an example of redistribution that works:
Consider, for example, what we know about food stamps, perennially targeted by conservatives who claim that they reduce the incentive to work. The historical evidence does indeed suggest that making food stamps available somewhat reduces work effort, especially by single mothers. But it also suggests that Americans who had access to food stamps when they were children grew up to be healthier and more productive than those who didn’t, which means that they made a bigger economic contribution. The purpose of the food stamp program was to reduce misery, but it’s a good guess that the program was also good for American economic growth.
And, if Krugman seeks more evidence that inequality is a drag on the economy, he need look no further than Canada. Since Stephen Harper gained a majority of seats in the House of Commons in 2011, he has taken a knife to government spending. This week, Canadian employment numbers were released. In the month of July, the Canadian economy produced 200 jobs -- that's not a misprint, those are two zeroes.
Perhaps "trickle up" is making a come back.
This entry is cross posted at The Moderate Voice.