The Economist explains: How inequality affects growth

INEQUALITY sits at the top of the political agenda in many countries around the world. Hillary Clinton, the leading Democratic candidate to succeed Barack Obama as president of the United States, made inequality the centrepiece of a major campaign speech on June 14th. On June 18th Pope Francis will deliver an encyclical, a high-level Vatican pronouncement, which is expected to address the problem of global inequality, among other issues. And on June 15th economists at the IMF released a study assessing the causes and consequences of rising inequality. The authors reckon that while inequality could cause all sorts of problems, governments should be especially concerned about its effects on growth. They estimate that a one percentage point increase in the income share of the top 20% will drag down growth by 0.08 percentage points over five years, while a rise in the income share of the bottom 20% actually boosts growth. But how does inequality affect economic growth rates?

How to tax the rich

Economists say that some inequality is needed to propel growth. Without the carrot of large financial rewards, risky entrepreneurship and innovation would grind to a halt. In 1975 Arthur Okun, an American economist, argued that societies cannot have both perfect equality and perfect efficiency, but must choose how much of one to sacrifice for the other. While most …<div class="og_rss_groups"></div>
Source: The Economy