Groundbreaking Work in the Field of Economics (That We’d Basically Already Figured Out)

Another addition , this time on the part of the OECD, to the growing body of economics literature on income and wealth inequality here attempts to highlight a causal relationship between inequality and a reduction in economic growth, particularly in long-term economic growth potential. For those readers not particularly interested in reading a 65-page economics paper, here is the key point the paper makes:

Drawing on harmonised data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth. In particular, what matters most is the gap between low income households and the rest of the population…It follows that policies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth

None of this is surprising to me, nor, I should expect, would it be surprising to many of my readers. In fact, I believe I have made a similar point in prior posts, albeit not backed up with any sort of data whatsoever. Simply because it is intuitive and sensible, however, does not make it trivial. The impact of inequality on growth is a question that has been plaguing economics for years, and the relative paucity of income inequality research (relative to other questions in economics) has prevented a decent answer to this question from emerging. Given the recent trend toward empiricism in economics, this paper (and, indeed, others like it) could prove to be definitive, not only in allow economics to take a stand on the issue of income inequality, but to pay the necessary attention to it in the first place.

Of more practical relevance to the general public, however, is that findings such as these could help create an ideological alliance of convenience. Economists pride themselves on their non-partisanship (a suspect claim), but it is difficult to argue non-partisanship in a field that has effectively ignored questions of income distribution, despite being by far the most equipped to tackle these questions. You can hardly blame them- one could argue that it is not strictly possible to be non-partisan at all, as people are all subject to prior beliefs regarding fairness, justice and morality.

Ideology (or, at least, the Western conception of ideology) has tended to pit growth vs equality, long before any relationship between the two was clarified or even studied. The study above may indeed be a first step to breaking that false dichotomy. We will never turn socialists into growth hawks or capitalists into bleeding hearts, but we may approach a grudging consensus in which we all accept that economies require some base level of equality in order to grow. Holders of capital are also often holders of power, and holders of capital tend to put stock in what the economic consensus has to say. As such, it is crucial to expand and strengthen this consensus so that we may have a shot at reversing (or at least reducing) the trend in which Western economies have headed.


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