Social inequality and economic growth

Modern politics needs to come up with ways of mitigating inequality without hurting economic growth.

The twin forces of globalisation and technical innovation have actually narrowed inequality globally, as poorer countries catch up with richer ones. But within many countries income gaps have widened. More than two-thirds of the world’s people live in countries where income disparities have risen since 1980, often to a startling degree. In America the share of national income going to the top 0.01% (some 16,000 families) has risen from just over 1% in 1980 to almost 5% now—an even bigger slice than the top 0.01% got in the Gilded Age.

It is also true that some measure of inequality is good for an economy. It sharpens incentives to work hard and take risks; it rewards the talented innovators who drive economic progress. Free-traders have always accepted that the more global a market, the greater the rewards will be for the winners. But as our special report this week argues, inequality has reached a stage where it can be inefficient and bad for growth.

That is most obvious in the emerging world. In China credit is siphoned to state-owned enterprises and well-connected insiders; the elite also gain from a string of monopolies. In Russia the oligarchs’ wealth has even less to do with entrepreneurialism. In India, too often, the same is true.

In the rich world the cronyism is better-hidden. One reason why Wall Street accounts for a disproportionate share of the wealthy is the implicit subsidy given to too-big-to-fail banks. From doctors to lawyers, many high-paying professions are full of unnecessary restrictive practices. And then there is the most unfair transfer of all—misdirected welfare spending. Social spending is often less about helping the poor than giving goodies to the relatively wealthy. In America the housing subsidy to the richest fifth (through mortgage-interest relief) is four times the amount spent on public housing for the poorest fifth.

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