The Right Question About Inequality and Growth
The relationship between inequality and growth has become a hot topic for economists, with new research challenging the conventional view that greater inequality is the price that must be paid for higher output. But for policymakers, this debate is a distraction; the real question is how to assess outcomes and improve modes of distribution.
CAMBRIDGE – The belief that inequality hurts economic growth is gaining currency among policymakers. Some argue forcefully that high levels of inequality can make sustained growth impossible, and may even contribute to recessions. This view stands in stark contrast to the traditional view that there is a tradeoff between equality and growth, and that greater inequality is a price that must be paid for higher output.
Lost in the discussion, however, is whether any of this is actually germane to economic policymaking. I don’t believe it is. Whether inequality is good or bad for growth should and will continue to concern social scientists. But those guiding an economy should focus on assessing outcomes and modes of distribution rather than on a puzzle that will never fully be solved.
Three developments make this refocusing necessary. For starters, while recent studies have concluded that higher levels of inequality produce lower long-term growth, other data have challenged this assumption, making definitive claims that are impossible to support, partly because different sources and types of inequality likely have different impacts on growth.