IMF: Reducing Inequality With Transfers Increases Growth

The International Monetary Fund put out a study yesterday about the effect of inequality and "redistribution" on growth. Among the dozens of conflicting uses of the word "redistribution," the study authors use it here to mean reducing inequality through transfer programs.

The paper draws upon a relatively new and apparently massive cross-country data set to reach three main findings:

First, more unequal societies tend to redistribute more. It is thus important in understanding the growth-inequality relationship to distinguish between market and net inequality. 
 
Second, lower net inequality is robustly correlated with faster and more durable growth, for a given level of redistribution. These results are highly supportive of our earlier work. 
 
And third, redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth. Thus the combined direct and indirect effects of redistribution—including the growth effects of the resulting lower inequality—are on average pro-growth. 
 
It is the last finding that is the really important one. Lovers of economic inequality are very fond of pointing to non-empirical modeling that is meant to tell us that constructing our distributive apparatus so as to reduce inequality through transfers will reduce growth. Given how mysterious much of the determinants of growth and productivity are, this speculated relationship has always been suspicious. And now, this IMF report finds that the opposite is actually true: reducing inequality through transfers increases growth.
 
The key graph comes on page 19:
 
 
The first column indicates that higher inequality (net inequality, meaning post-transfer inequality) is associated with lower growth. The second column indicates that higher amounts of redistribution have zero effect on growth in and of themselves. The third column generates the logical (and observed) outcome of combining the first two columns: because inequality reduces growth and redistribution levels have no effect on it, redistribution actually increases growth by reducing inequality.
 
So, at least within the parameters specified by this graph, redistribution can be described as a costless way to reduce inequality and thereby increase growth.
 
This is good news for egalitarians on the merits, though we know ultimately that opposition to reducing inequality is not driven by the facts, but political ideology. Should this finding become conventional wisdom, be prepared for the partisans of high inequality to produce arguments for why we should sacrifice growth to make sure the rich get what they deserve.

Comments