Inequality & growth

In his recent speech (pdf), Boris Johnson demonstrates a first-class mind - such a mind being one that tell its audience what it wants to hear. He says:

Some measure of inequality is essential for the spirit of envy and keeping up with the Joneses that is, like greed, a valuable spur to economic activity.

In part, this is a straw man; nobody is arguing for complete equality. It poses - but does not answer - the question: is the inequality we now have conducive to growth or not?

Two big things suggest not. First, GDP growth recently - and for that matter before the crisis - has been poor even as inequality, as measured by the share of incomes going to the top 1%, has risen. Secondly, we enjoyed decent growth in the 50s and 60s when inequality was lower than it is now.

Of course, these two facts prove nothing. There are countless possible influences upon trend GDP other than inequality, and it's probably impossible to control for them all. But they do hint at something - that perhaps there are some mechanisms offsetting the ones Mr Johnson mentions. And these might cause inequality - beyond some point - to depress growth (pdf). These are:

 - The urge to keep up with the Joneses doesn't just spur useful work. It might also encourage people to get into debt to spend as much as the rich, and this can (perhaps) lead to over-gearing and a financial crisis. The experience of the 00s might not be the only data-point here. Rising inequality in the 1920s also ended in depression.

 - Inequality can reduce trust, and distrust can reduce growth.

 - Inequality might be a symptom of a dysfunctional economic and political system. If we have monopoly or other market failure and/or crony capitalism, we'll see some mega-rich people, but not a thriving economy.

 - Inequality might itself create dysfunctional politics. If the poor push for redistributive policies which weaken investment incentives, or if the rich use their wealth to buy political favours, growth will suffer.

Now, I don't say this to claim that inequality is always and everywhere bad for growth. I do so merely to suggest that Mr J was expressing a very partial point of view, and was simplifying horribly. It's a good job he is merely a minor local politician who isn't in charge of anywhere important.  

Comments

[ExtraBold]

So you're saying you don't know whether BJ is right or not (and nor does he)?

Also why this 'share of top 1%' measure. What is wrong with the gini index? It seems to be the most one measure that doesn't ignore most of the data.

[Robert Rea]

Mr J could perhaps have benefited from an education in analytical thinking at one of our august elite univer... oh. Hang on.

[Luis Enrique]

altruism is also a valuable spur to economic activity - I might found a company because I want to provide a useful good or service. Wanting to earn a fair return could also motivate economic activity. I don't see why greed would be especially helpful, in fact I am more inclined to think the greedy will go for ripping people off than useful "economic activity"

[George N. Wells]

There will always be inequality. The question is: Does being poor have to mean that poor people starve and/or die from treatable disease just because they are poor?

[Six8Fifty]

What we would like to see is *real competition* - where all participants play with and by the same rules and everyone has some degree of chance to rise to the top according to effort and talent (and yes a bit of luck too).
But we know that the playing field is anything but level, rules usually apply with greater force to the weakest party and effort is usually spent on lobbying and defending privileges rather than competing outright.
This kind of inequality IMO contributes to create the glass-ceilings, class divides, entrance barriers and crowd-outs that are typical of "unjust inequality".

[hampus]

"nobody is calling for complete equality"
I don't know about that, I certainly am. Never realizable, but just like democracy is a process so is equality.

[Patrickhadfield.wordpress.com]

Boris also demonstrates lack of understanding of the meaning of IQ, too.

[rogerh]

I suppose coveting thy neighbours ox (or ass) has gone on for a long time. I fear Boris is more right than wrong - wanting something better is a natural human force. Not sure how GDP growth and 'top 1% share' are causally related but your graph suggests a return to long term trend.

Boris touches upon the IQ/ability question. Now I doubt human IQ/ability has changed much since Plato's day but what has changed in the last 20 years is that Boris's mates and their servants have followed inexorable economic logic and pushed the simpler jobs offshore and not replaced those jobs with home-grown replacements. Not their fault - just doing their jobs. The effect has been to raise the IQ/ability bar such that fewer cornflakes are now deemed useful. Which raises the question - just how do you expect to run a high-tech service economy based on clever-dicks when all you have to hand is ordinary human clay?

Plainly more taxation is the answer, sweetening the pill is the politician's job.

[rogerh]

Last para should read:

Plainly more taxation and more immigration is the answer, sweetening the pill is the politician's job. On this point Boris was less than effusive.

[Popular Economics]

It's remarkable how right wing economists continue to justify starving the poorest by saying it only makes them work harder to better themselves! Hah...That has always been the slave-master relationship. How about reading R Wilkinson's "The Spirit Level" for the real damage such inequality has caused U.S.--highest incarceration/crime rates of any developed country, worst health outcomes, birth-death rates, not to speak of exploding gun violence. If only more 'slaves' would wake up to these facts and throw off their masters.

[Lasse]

"The dissatisfied people of the working class that did believe they had a hard time and the rich was much better of, did get some words of encouragement from the archworker Paley in 1793:

‘Some of the trying that poverty… lay up on you are not hardship, instead it’s a pleasure. Economy is in it self a joy. It’s training in attention and inventiveness that… gives satisfaction… This will disappear in the abundance… There is no joy associate with the ability to take of a great amount of money… Another great advantage that persons in lower positions have is witch easiness they provide for there children. All what a poor mans children need, can be concluded in two words: diligence and innocence.’

‘Another thing the poor frequently use to envy the rich, is there easy-going life. But in this they misread the circumstances completely… Rest does one do after the work is done. The rest can therefore not be appreciated or even felted when one not have been exhausted. The rich does not without envy see the recover and delight that the rest give to poor people.’"

Leo Huberman - Man's Worldly Goods

[Kaleberg]

Inequality with a stagnant elite always works against economic growth. The rich spend less than they take in. If they don't, then they eventually stop being rich. The money that they don't spend effectively leaves the economy and eventually the economy runs down. That's what basic accounting says at least. Accounting is to economics as physics is to chemistry or biology, so you can use it as a reality check.

(There is no point in differentiating between spending and investment. If the money moves into the financial sector, only a small percentage of it is actually spent as financial fees. Otherwise it is no longer in the economy.)

[TickyW]

For the avoidance of doubt, this was how UK incomes were distributed in 2011.

http://theuxbridgegraduate.wordpress.com/2013/09/29/definitively-rich/