The IMF issued a new report yesterday that confirms something I and many in the tax justice movement have been sure of for some time, which is that reducing inequality positively improves the prospects for economic growth even when that reduction comes as a result of redistribution by taxation.
The report, authored by senior IMF economists Jonathan D. Ostry and Andrew Berg concludes:
First, we continue to find that inequality is a robust and powerful determinant both of the pace of medium-term growth and of the duration of growth spells, even controlling for the size of redistributive transfers. Thus, it would still be a mistake to focus on growth and let inequality take care of itself, if only because the resulting growth may be low and unsustainable. Inequality and unsustainable growth may be two sides of the same coin.
And second, there is remarkably little evidence in the historical data used in our paper of adverse effects of fiscal redistribution on growth. The average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth. We find some mixed signs that very large redistributions may have direct negative effects on growth duration, such that the overall effect–including the positive effect on growth through lower inequality–is roughly growth-neutral.
This will, of course, be a complete shock to neoliberal economists. The whole logic of their approach is that without the differential of inequality then there is no incentive for growth. This study shows that is not just not true, but that the reverse is true.
Actually, to anyone with an understanding of both human nature and economic reality (neither apparently possessed by neoliberal economists and so absent from the assumptions which automatically lead to the conclusions of their work) this finding is glaringly obvious.
Let's deal with the economics first. Reduced inequality inevitably means a broader base of ownership for capital. That means more people have access to opportunity to create businesses and unsurprisingly increased growth will follow.
There is a second aspect to this economics: it's not just a broader capital base provides opportunity; if the capital base is concentrated those who own it will expend considerable effort in creating barriers to entry against newcomers using, amongst other things, tax haven activities to achieve this aim. This is now very clearly recognised in behavioural economics; the fear of loss in most people is such that it is almost inevitable they will behave in this way. The sums expended in creating these barriers to entry will always be less if capital ownership is more diverse and so growth is bound to be higher.
So what's the bit about human nature? Well, actually this comes from the acknowledged fact that convergence to the mean is normal, but recognises that the progression is quicker if the distance to be travelled is smaller. People instinctively know that, so the motive to succeed is greater when inequality is lower.
The IMF economists have done us a service in this paper. The Washington Post has noticed that fact; they have claimed communists have taken over the IMF when, actually, evidence has. But the dogmatists aren't too keen on that.
For those in the UK the big question that arises from this is when will our political parties notice, because right now our tax system under delivers on redistribution? It's time to change that - because as is clear, redistribution provides the best chance we have for delivering growth in this country. We need it, soon.
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Adam Smith himself said so.
No one every points out the irony that the IMF seems to both the upholder of neo-liberal austerity AND it’s critic! ‘Shurely shome mishtake (ed)’ as the Private Eye used to say!
I agree: but there is a welcome shift now against the previous single voice
Yes- but it always feels hollow and tokenistic unfortunately.
Your quote here: “Reduced inequality inevitably means a broader base of ownership for capital. That means more people have access to opportunity to create businesses and unsurprisingly increased growth will follow.” is a splendid line of reasoning.
I was reflecting on something similar a few days ago while driving to Norwich. I think probably, most of the significant decisions about how our society is run are now made by capital, rather than by vote (possibly it’s never been very different in modern history, I don’t know).
I suppose there are many reasons for this, but because the vast majority of capital is concentrated in a small number of hands, it means that effectively, the vast majority of society has very little input on how their world is run. They’re enormously disempowered. In effect, disenfranchised.
I like that you make clear this isn’t just suspicious from the point of view of governance, but its also unwise from a hard nosed economic point of view. It means we’ve lost the wisdom of the crowd’s decision making. We lose the little tiny startups that bring real innovation and exploit the niches of diversity. We’ve also lost the benefit of society holding the wide basket of “investments” that a crowd would make. Instead we’re concentrating investment in to just a few places with the ensuing risk that brings.
Agreed
Keep driving to Norwich!
This is encouraging but the need for growth itself, our absurd money creation system, needs to be questioned and, so far, mostly isn’t. It’s like we’re all supposed to go, “Phew, growth at last!” without ever asking why it’s needed in the first place.
That’s right Bill. Endless growth is occurring because the very creation of money comes from private debt. And that debt is always greater than any output! Consequently, more and more debt needs to be created in order to pay off this debt and create the money supply.
CH Douglas’s solution of Social Credit, that is, creating money and handing it to everyone regardless of income in order to overcome the spending gap that debt creates, is fairly elegant. Sadly though, it has never really been tried.
Modern Money Theory has a different take on debt/surpluses – I’m beginning to look at their ideas.