Fixing Inequality Won't Hurt the Economy

http://www.theatlantic.com/business/archive/2014/03/fixing-inequality-wont-hurt-the-economy/284159/

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Inequality is a choice, but it's not one we have to make to grow.

That might sound obvious, but isn't to economists. Most of them think there has to be a trade-off between equality and efficiency. That taxing the rich to give to the poor has to slow the economy down. Because rich and poor alike will have less incentive to work, so they won't.

But, as you may have noticed, the world doesn't always work the way economists think it has to. It turns out that redistribution might actually increase growth, at least within limits. That's the conclusion of a new paper from the International Monetary Fund (IMF) that looks at how inequality and redistribution affect how much and how long the economy grows. The trick is isolating how much redistribution helps growth by reducing inequality, and how much it hurts growth by reducing work incentives. But the researchers were able to do this by looking at Frederick Solt's data on country's inequality before and after taxes-and-transfers, and then running a few tests. Here are the big takeaways. (Note: The Gini index measures the income distribution on a scale from 0, where there's perfect equality, to 100, where there's perfect inequality).

1. If two countries have the same amount of redistribution, the one with more inequality will tend to grow less. Specifically, moving from the 50th to the 60th percentiles for inequality will knock 0.5 percentage points off of per capita growth a year.

2. If two countries have the same amount of inequality, the one with more redistribution will not tend to grow any less—at least not in a statistically significant way.