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Does high income inequality lead to lower economic growth? There are two main reasons to think it might. The first is simple: rich people spend a smaller percentage of their income than the non-rich. Thus, as more and more income accrues to the rich, we get less net consumption and thus slower growth.

The evidence on this score turns out to be pretty hazy. It seems logical, but if you look at consumption trends over time you just don't see it. But there's a second theory that's more interesting: as inequality rises, the rich increasingly need to find good places to invest all the money they're accumulating. Eventually concrete business opportunities start to become scarce, so they look around for other places to put their money to work. In practice, this means the rich become net lenders to the middle class. They can hardly be loaning money to each other, after all, since they all have more of it than they can use for current consumption.

So the rich lend money to the middle class, which is an eager recipient because their incomes are stagnant. But as the debt load of the middle class increases, this lending becomes ever more Byzantine and ever more risky. Eventually, the middle class simply can't take on more debt and the whole system comes to a screeching halt. The result is an economic recession as consumers try to work themselves out from under the mountain of debt they've run up.

There's an intriguing amount of evidence to back up this theory, and in a new report released yesterday a team of IMF researchers provides another reason to believe it. They find that high inequality is indeed associated with slower growth, but the mechanism for that slower growth comes in reduced growth spells. That is, it's not that countries with high inequality have steady growth rates that happen to be a little lower than countries with low inequality. Rather, they have shorter spells of economic expansion. In particular, the authors find that a 1-point increase in a country's GINI score (a measure of inequality) is associated with a decrease of about 7 percent in the length of its growth spells.

In other words, countries with high inequality simply can't maintain economic booms as long as countries with lower inequality. This is consistent with the idea that growth in these countries is driven partly by the rich loaning money to the middle class, which is obviously less sustainable than growth driven by an increase in middle-class wages. In high-inequality countries, growth is too dependent on financialization and leverage. When the merry-go-round stops, as it inevitably must, the boom times are over.

The IMF team also found that—within reason—redistribution doesn't seem to harm growth. In fact, just the opposite: "The combined direct and indirect effects of redistribution—including the growth effects of the resulting lower inequality—are on average pro-growth."

To pick up on the theme of the previous post, this is something we all understood back in the era when unions were powerful advocates for the middle class. Of course rising middle-class wages are a prerequisite for sustainable growth in a mixed consumer economy like ours. And the more stagnant those wages are—and the aughts were by far the worst decade for stagnant wages since World War II—the more fragile economic growth is.

Now we have an IMF report to add to the technical evidence that middle-class wage stagnation is bad for the economy. But who has the raw political power to force the business community to listen to it?

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Originally posted by AURaptor:

Hurray for redistribution !!!

Screw freedom. Just make everyone the same, huh?

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Want to explain the above so that it has some context or makes some sense?

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Originally posted by Magonsdaughter:
Hmmm. I must be bored.

I am assuming that in Rappy's brain, if you don't have vast inequality in income, nobody will dig ditches.


Ditch digging aint what it used to be....

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The world needs ditch diggers

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Originally posted by kpo:

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The world needs ditch diggers

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I would say the world needs a strong middle class.

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Originally posted by SIGNYM:
Are so-called high-level economists really that stupid?

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Originally posted by AURaptor:


Missing my meaning, entirely. Again.

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Originally posted by SIGNYM:
Well DUH. OF COURSE income inequality harms economic growth! They needed a study for that???

What's the point of an economy other than to produce, exchange, and consume goods and services, and to create surpluses for research, entertainment, and future needs? If a large portion of the money supply - which is used to facilitate this activity- is created and hoarded by a tiny minority, all of this exchange slows down.

Are so-called high-level economists really that stupid? If they are, we're really in trouble!

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Originally posted by Magonsdaughter:

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Originally posted by AURaptor:


Missing my meaning, entirely. Again.

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Explain yourself then. And trying using more than 8 words.

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Originally posted by AURaptor:
Brevity is the soul of wit.

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Not generally in your case, I have found.

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I was pointing out that , in a modern civilized society, there will be a need for EVERYONE in the work force. Not everyone is a Bill Gates. There are thinkers, doers, diggers, and everyone in between.

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It's better if everyone has an income, I agree. However, technological advances means that there are increasingly less jobs for low skilled workers. Hence my photo of a ditch witch. We don't need the amount of labour to build a ditch than we did 50 or 100 years ago. But we do need someone who has the skills to operate machinery.

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This isn't Medieval times, where folks are born into a caste, and grow up either barbers, farmers, or nobility. People can be pretty much what ever the hell they want to be, provided they do the work needed to make it. And what you do as a 15,16 year old doesn't mean you're stuck in that level of income for the rest of your life.

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Depends on where you live and how much social mobility can occur in your society. There are plenty of places in the world where if you are born in poverty you remain in poverty. And get your head around this one, they tend to be places with vast inequality of income. And according to research, social mobility aint that flash in the US currently

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The correlation between parents' income and their children's income in the United States is estimated between .4 and .6. If there was perfect economic mobility and being raised in poverty was not a disadvantage, you would espect to see 20% of children who started in that bottom quintile remaining there as adults. That is not what research shows. According to a 2012 Pew Economic Mobility Project study[15] 43% of children born into the bottom quintile remain in that bottom quintile as adults. Correspondingly, 40% of children raised in the top quintile will remain there as adults at 63% of those children will remain above the middle. Additionally, large shifts in income between childhood and adulthood are very unlikely to occur. Only 4% of those raised in the bottom quintile to the top quintile as adults, and only 8% of children born into the top quintile fall to the bottom.[15] These findings have led researchers to conclude that "opportunity structures create and determine future generations' changes for success. Hence, our lot in life is at least partially determined by where we grow up, and this is partially determined by where our parents grew up, and so on."[16]

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Here's a comparison of social mobility in various countries, based on fathers income.


So basically in the US, you are heading towards feudalism with increasingly less chance of getting out of the poverty trap.

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That's why I cringe at this bullshit idea that those who make min wage jobs deserve a LIVING wage. You deserve what you get, dammit. Just because you deliver pizzas for a living doesn't mean you can comfortably raise a family and take 2 weeks vacation every year. You might do well in some college town, but probably not so well if you're out in the sticks, where there are fewer folks and even less demand for delivery pizza.

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I don't think you understand how any of this works. No-one is suggesting a pizza driver should make the same as a CEO, or that there wouldn't be casual work, or a youth wage. I believe in some minimum conditions and wages, which exist here, but are still are pretty basic. On a minimum wage, you're not living the life of leisure, but not having to rely on government handouts to enable you to eat.

So how low would you enable the employer to go in terms of wages. Bangladesh sweat shop conditions okay with you? After all, that's where pure supply and demand gets you.

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The lure of everyone not doing jack - squat and still living a life of leisure may sound appealing, but it's a fairy tale. It's not how this nation was forged. As Lady Thatcher correctly pointed out... sooner or later, you'll run out of other people's money.

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Lady thatcher's legacy is apparant in the graph above. The majority of people who live lives of leisure and do jack squat are those whose parents have great wealth according to those figures.