Communists have seized the IMF!

February 26, 2014


(Photo by Linda Davidson / The Washington Post)

Mitt Romney, take out your wallet.

After decades of serving as the hard hand of global capitalism, the International Monetary Fund has taken another step in a tone-softening campaign that has already seen it shift gears in favor of letting developing countries control flows of private capital (once an  ideological no-no) and acknowledging that it has been too harsh in some of the budget cutting it has doled out.

Now the final shoe drops: Socialism just might work.

Sort of. Or at least soft-socialist policies used to redistribute income. Sometimes. If it doesn't get out of hand.

Okay scratch that. The IMF paper released Wednesday does not mention the word socialism. But it does go deep into the philosophical fray over income inequality in a piece of econometrics that challenges some basic tenets about the impact of government policies that redistribute income.

The classic "big trade-off," as economist Arthur Okun dubbed it in the 1970s, is that government efforts to redistribute wealth almost by necessity undermine future growth. There may be good social reasons for accepting the trade-off. Just ask Marie Antoinette. But, conventionally, the trade-off is considered pretty immutable -- that taking increasing amounts through taxation means less incentive to take entrepreneurial risks, less money available to invest, and, ultimately, a smaller economic pie that leaves everyone with smaller slices, even if they are more even.

There has, of course, been growing concern about the increase of income inequality in the developed world. There is, write authors Jonathan D. Ostry, Andrew Berg, Charalambos G. Tsangarides, a "tentative consensus" that when a society's income is too skewed, all sorts of bad things happen. In rich nations, it may create incentives for the rich to misbehave - and pressure for policies that let them accumulate even more, take unwise risks, pile up leverage, and increase the possibility of financial crises (sound familiar?) In any country, there's the common sense argument that, as the authors write, an unhealthy concentration of wealth in a few hands "can undermine progress in health and education, cause investment-reducing political and economic instability, and undercut the social consensus...Thus it tends to reduce the pace and durability of growth."

But what effect do redistributive polices themselves might have on growth? A country facing rising inequality can spread the money around better through its power to tax. But is the cure worse than the disease? Does the damage done to growth through redistribution offset the benefit to growth caused by reduced inequality?

It's that question the researchers set out to answer by looking at a recently tabulated survey of nations that compared "market inequality" -- the distribution of income arising naturally in the local economy -- with "net inequality" -- the distribution of income after the action of government programs. That gave them a measure of the extent of redistributive policies, and allowed correlation with growth, and the extent and length of growth episodes.

Having started the research with a basic belief in Okun's original "trade-off," what they found surprised them: "Redistribution appears generally benign in terms of its impact on growth." Redistribution, as Okun posited, may be a direct drag on the economy. But the reduction in inequality provided a boost that was as large or larger. On average, across a group of countries that included the U.S. and industrialized western nations as well as developing markets, "the combined...effects of redistribution -- including the growth effects of the resulting lower inequality -- are on average pro-growth."

So everyone should rush out and rob a bank? Or join managing director Christine Lagarde in a loud shout of "propriété, c'est le vol."

Not so fast. Things can go too far: societies that redistributed the most -- including core European nations like France (where Lagarde was once finance minister) and Germany -- did appear to take a hit in terms of the duration of "growth spells."

And in a telephone interview, Ostry and Berg were emphatic in qualifying the findings.

"There is no direct implication for fund policy advice," Ostry said. "We don't want anyone to take away that it is impossible to royally hurt your economy if you design redistribution in a bad way."

Turns out they are capitalists after all, but with new IMF characteristics.

"On average the things that governments have done have not been destructive to growth," said Ostry. "On the whole, the average redistribution has had very benign effects on growth and through the impact on quality have had a highly robust and protective effect on the level of medium run growth and the duration of growth spells."

"We would not be selling this as being either for or against" particular policies, he said. But "my sense is that this work will make people think."

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