The Mythical Link Between Income Inequality and Slow Growth

Matthew Schoenfeld writes at the WSJ:

From 2000-10, many of the 34 OECD countries propped up growth by launching expansive social programs with borrowed money. But not all. The five most “unequal” countries in the OECD report—Israel, the United States, Turkey, Mexico and Chile—largely abstained. They increased sovereign debt by 3% on average compared with a 40% average increase among other OECD members.

When austerity pressures caught up to debt-laden sovereigns in recent years, however, the less leveraged—and not coincidentally, less equal—member countries grew a lot faster than their peers. From 2011-13, according to the World Bank, the five most unequal countries grew nearly five times faster (3.9% cumulative annual average) than the others (0.84%). By using a 2010 cutoff, the OECD has skewed its findings.

Thsi data destroys the argument that an economy grows faster if you tax and redistribute more.

Consider Greece. From 1999-2012, its Gini coefficient “improved” by 6% to .34 from .36—more than any other OECD country. (The Gini coefficient measures income distribution, where 0 represents complete equality and 1 represents a society in which a single person has all the income). Greece’s redistributive social transfer spending also grew most quickly among OECD peers from 2000-12. But Greece’s economy has shrunk by more than 20% since 2010 (World Bank data), and today more than a third of its citizens are considered to be at risk of poverty (Eurostat data).

Equality can mean equality of poverty.

From 1995-2012, OECD member countries that increased government expenditures as a percentage of GDP grew 30% slower than member countries that trimmed government expenditure as a percentage of the economy over that span—average annual growth of 1.9% compared with 2.5%.

This is no surprise.