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More, not less, equality needed for economic growth

Now the attention of Australian policy-makers is turning to maximising prosperity, understood as GDP growth, over the next few years.

The Australian’s Michael Stutchbury says this will require ‘tough-love’ policies.

Usually, this is code for giving carrots to the rich and sticks to the poor. Tough for the bottom of society, great for the top,

In economics, inequality rocks. Right?

Well, actually no.

Inequality peaked in the US just before the great depression, and it only returned to those levels just before the GFC (see Palma, Cambridge Journal of Economics).

That’s not news. Keynes pointed out that inequality made the economy more unstable.

In the period before the GFC, growing inequality encouraged people to go into debt to ‘keep up’, contributing to excessive consumer debt and a housing bubble.

This week nobel laureate and NYT columnist Paul Krugman has pointed out that the economy grew faster, and media family incomes much faster, before modern finance, and the whole neoliberal experiment, when incomes were less unequal:

Take the United States, which wasn’t damaged in the war. Take per capita real GDP. Give hostages by taking data from 1950 to 1980, which means including the 1980 recession, but stopping at 2007, so that the current slump isn’t included. Then here’s what you get:

Growth in per capita real GDP from 1950 to 1980: 2.2 percent per year

Growth in per capita real GDP from 1980 to 2007: 2.0 percent per year

Oh, and if we look at real median family income instead, we get:

Growth from 1950 to 1980: 2.3 percent per year

Growth from 1980 to 2007: 0.7 percent per year

Sorry: there’s no measure I can think of by which the U.S. economy has done better since 1980 than it did over an equivalent time span before 1980. It may be something you’ve heard, it may be something you’d like to believe, but it just didn’t happen.

We also know that more equality is better for everyone in society, with the possible exception of the super-rich, because of a recent book that brought together all the evidence, “The Spirit Level: why more equal societies always do better”. A key argument is that:

While it is often assumed that social problems bear little relationship to average incomes, the evidence suggests that income differentials within populations matter a great deal, and this is as true of American states as it is of countries around the world.

In the most unequal countries and states, there is more gender inequality, too, and these places are less generous. A higher proportion of people suffer from mental illness, and more use drugs.

Less egalitarian countries have six times as much obesity. Educational attainment is poorer, with higher dropout rates, shorter periods of paid maternity leave and less early childhood education. Teenage birth rates are higher, and it is young men from disadvantaged neighbourhoods who are most likely to be the victims and perpetrators of violence.

In more unequal countries, children experience more bullying, fights and conflict, and rates of imprisonment are five times higher. Although it is possible that heath and social problems cause bigger income differentials, inequalities are the common denominator.

The same is true for economic growth. If we want growth we have to ensure that the benefits (and the tough-love stuff) are seen to be borne more equally than in recent decades.

Unfortunately, few Australian policy makers and commentators seem willing to recognise the need for more, not less, equality.

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  • 1
    Croakey
    Posted November 11, 2009 at 12:01 pm | Permalink

    Great piece! Inequity is one of the big issues for health. It’s not simply that poorer people tend to have worse health; but they also are less likely to have access to health care or related services. There is a lot of rhetoric within the health sector about tackling these inequities but so much of the action of governments and powerful professional groups only exacerbates them. Perhaps meaningful change will only come when the discussions about health inequities starts to engage powerbrokers beyond health. Another reason why your piece is welcome (and I will put a link up at Croakey right now!)

  • 2
    Trevor Cook
    Posted November 11, 2009 at 2:05 pm | Permalink

    Thanks Melissa, glad you liked it. Interestingly the authors of the spirit level are from the health side of things and the book is housed in the medicine library at Sydney Uni!

  • 3
    JamesH
    Posted November 12, 2009 at 10:42 am | Permalink

    Good to see this issue getting a little more coverage.
    There has been some interesting work (paper by Andrew Leigh and Christopher Jencks here: http://econrsss.anu.edu.au/~aleigh/pdf/InequalityMortality.pdf) saying that this effect largely disappears if it is done on within-country historical trends; that is, when a country’s inequality goes up or down, its population does not necessarily respond. How to interpret this disjuncture is anyone’s guess; mine is that a change in inequality has to be sustained for a significant period of time and given time to affect the stress and hormone levels of the very young and their parents, which then sets their attitudes etc for the rest of their life. If true, this calls for caution on asserting that changing inequality would have good short-term effects, as opposed to long-term effects.

  • 4
    Friar Hilarius
    Posted November 13, 2009 at 8:33 am | Permalink

    I recently found that in 2008 the top 83 nations in terms of per capita GDP increased this measure at a slower rate than the bottom 83

    Perhaps at glacial lack of speed we are moving to a more equal world

    Some evidence that we could be moving to a global average wage for equal levels of skill is seen in the way bids are made for work projects on the internet

    I saw where out of work American financiers would bid US$ 100 an hour for work but were undercut by Asians willing to do the work for far less … more strength to the hard working Asians, I say!

    My heart does not exactly bleed for out of work American bankers

    The book “Globality” sub-titled “Competing with Everyone, from Everywhere, for Everything” by Sirkin, Hemerling and Bhattacharya deals with the increasing mobility of capital in the global economy and trends towards a global average standard of living

    My personal view is that Credit has been dis-credited and that the next major move in economics needs to be to a Savings Based funding of affordable growth

    This needs to be coupled with the destruction of manipulated consumerism. The new religion of Mass Marketing, a cult practised so viciously in its Shopping Mall Temples, needs to be exposed as the most dangerous cult in the planet.

    Buying what we can not afford simply brings forward spending and builds a bubble of demand which can not be sustained as the appetite for credit is stretched beyond reasonable limits

    If tax and every other law encouraged savings and we spent only our savings, or better still our interest on savings we might take much more care in starting projects which have social value as distinct from value to the Cult of Consumerism and Marketing and its bogus claim to promote higher living standards

    The highest standards of living may well be enjoyed by those who want less rather than more. Certainly they have a greater chance of attaining peace and satisifaction as well as freedom from debt if their needs are less.

    There is Life after Debt

    Friar Hilarius
    http://yourlifeafterdebt.blogspot.com/2009/11/new-lives-for-old.html

  • 5
    Croakey
    Posted November 13, 2009 at 11:56 am | Permalink

    Some new research, estimating more than a million premature deaths are due to income inequality, reported at Croakey: http://blogs.crikey.com.au/croakey/2009/11/13/reads-of-the-week/

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