Little evidence that inequality hurts growth

Does economic inequality hurt economic growth? Writing in the latest print edition of National Review, Ramesh Ponnuru and Yuval Levin express their doubts.

The Left is of course ideologically committed to the view that rising inequality of income and wealth is in itself a terrible wrong. Conservatives incline instead to the view that poverty and social immobility are distinct from economic inequality (even if all three can sometimes result from the same causes) and are much more important problems to address. The Left has attempted to overcome this disagreement by arguing that inequality is a cause of economic problems that even non-leftists agree demand public action. It is a cause, that is, of poor growth, diminished standards of living, and poor economic mobility and opportunity. That leap is not well supported by the economic data.

It is not hard to imagine possible mechanisms by which inequality might hinder growth, but it is quite hard to find compelling evidence that it has done so. While rising inequality sometimes correlates with slower growth, it also sometimes correlates with faster growth, both here and abroad. In one 2011 study, Harvard’s Christopher Jencks and his team found that there was no relationship between changes in inequality and changes in economic growth in the United States or abroad over the past century.

Similarly, rising inequality does not appear to have caused the stagnation of wages or purchasing power among the poor and middle class, even if at some times (but not others) it has coincided with it. And what may be the most prominent plank of the Left’s inequality argument — the notion that inequality has been the cause of inadequate upward mobility — also lacks clear evidence.

Upward mobility has indeed been too weak for many years in America — though recent evidence suggests it has not been getting worse (or better) in the past several decades as inequality has increased. The case that rising inequality is to blame for poor mobility was prominently made in a 2012 speech by Alan Krueger, the Princeton economist who was at the time the chairman of President Obama’s Council of Economic Advisers. Krueger looked at levels of inequality and the relationships between the incomes of fathers and those of their sons in the United States and several other developed countries. Plotting the two on different axes of the same chart, he found that higher levels of inequality corresponded to lower levels of intergenerational mobility, and he famously called the line showing that relationship the “Great Gatsby Curve.”

But as the Manhattan Institute’s Scott Winship, among others, has shown, there is nothing approaching a sufficient foundation for asserting that the relationship shown on Krueger’s chart is a case of causation rather than just correlation. And more recent data regarding inequality in different regions of the United States also cast doubt on that claim. Other assertions about the doleful effects of inequality — notably that it contributes to financial instability and political dysfunction — are even more speculative, piling one contestable assertion atop another.

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