Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth

Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide Not Just A Problem For The Poor Do societies inevitably face a choice between efficient production and the equitable distribution of income? According to IMF economists Andrew Berg, Jonathan Ostry, and Jeromin Zettelmeyer, the answer is no. They argue that the empirical literature on growth and inequality using long-run average growth may have missed how income distribution is tied to abrupt ends in growth. Their work examined growth over a long time horizon, between 1950 and 2006, focusing on the duration of growth spells, and showed that there may be no trade-off between efficiency and equality (51). In fact, they posited that equality could be an important component of sustained growth, observing that the level of inequality may be the key difference between countries that enjoy extended, rapid expansion and those whose growth spurts quickly dissipate. In short, promoting greater equality may also improve efficiency in the form of more sustainable long-run growth. Of the number of variables associated with longer growth spells, income inequality's relationship with the duration of growth spells was the strongest (see chart 8). They found that a 10% decrease in inequality (a change in the Gini coefficient to 0.37 from 0.40) increases the expected length of a growth spell by 50%. Chart 8 Income Distribution Has A Stronger Impact On How Long Growth Lasts Than Other Factors S Percent change in expected grovith duration External debt Exchange rate competitiveness Foreign direct investment Political institution Trade openness Income distribution 0 10 20 30 40 50 60 Note: See Glossary of Relevant Terms for details on author’ calculations. Source: Bergand Ostry, “Equality and Efficiency’, September 2011. © Standard & Poor's 2014. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 5, 2014 18 1351366 | 302136118 HOUSE_OVERSIGHT_025780