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Nov 10, 2009

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

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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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