Obama was right: To boost the economy, spread the wealth

Two recent reports from the International Monetary Fund – one just out today – make a compelling case that not only is inequality bad for economic growth, but redistributive policies might also actually be good for it.

These reports are part of what Oxfam America’s Nick Galasso calls a new “evidence-based arsenal” of inequality research coming from the Fund that’s challenging conventional economic wisdom, which has long held that efforts to redistribute wealth undermine future growth.

The new studies are absolutely unequivocal on the issue: “Redistribution is overall pro-growth,” the authors write. “On average, across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth.”

The two charts below help illustrate the relationship between inequality and GDP growth (on the left), and redistribution and GDP growth (on the right). The authors note a “strong negative relationship” between inequality and growth – as inequality increases, growth numbers decline. Turning to the redistribution chart, the nearly-flat line indicates a weak (and if anything, positive) relationship between redistributive policies and GDP.

inequality, redistribution and growth

So what does this all mean for policymakers? That’s the subject of today’s report. IMF economists examined a number of fiscal policy interventions that would reduce inequality with minimal or non-existent negative impacts on GDP growth. The report is less of a policy prescription and more of a menu of options for would-be equality reformers. Among their suggestions:

  • Raise the retirement age for pension plans (think Social Security) and means-test them – that is, gradually phase out benefits for higher wage earners.
  • Shorten the maximum time allowed for collecting unemployment benefits, to encourage return to work or transition to other safety net services.
  • Improve access to education for low-income families, particularly college education.
  • Improve access to health services for low-income families.
  • Implement more progressive income tax rate structures.
  • Reform personal income tax exemptions and deductions, particularly the mortgage interest deduction.

There are policy suggestions in the report that will appeal to both conservatives and liberals. The Obama administration, for instance, can use the emphasis on expanded access to healthcare to bolster support for the Affordable Care Act. Conservatives will cheer the call for reduced unemployment benefit duration.

The important thing to keep in mind is that if the IMF’s conclusions are correct – and they have an awful lot of data to back up their claims – these policy interventions can be undertaken with no negative impact on GDP. In the authors’ words, it’s “a win-win.”

Christopher Ingraham is a data journalist focusing primarily on issues of politics, policy and economics. He previously worked at the Brookings Institution and the Pew Research Center.
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