Why the rich getting richer is bad for growth

New IMF research shows that an increase in the income share of the poor boosts the whole economy

 

“When the rich get richer, a country’s economic health can suffer. But if the poorest members of a society start climbing the wealth ladder, then national growth can receive a boost.”

That’s the conclusion of IMF researchers, whose new report shows that income distribution itself, not just income inequality, matters for growth.

Specifically, the research shows, growth declines over the medium term if the income share of the top 20 per cent increases. This seems to refute the theory of ‘trickle down’ pretty conclusively.

In contrast, an increase in the income share of the bottom 20 per cent (defined as ‘the poor’) is associated with higher GDP growth.

In December, an OECD paper said that the impact of inequality on growth stems from the gap between the bottom 40 percent with the rest of society, not just the poorest ten percent.

The IMF also emphasises the importance of boosting the incomes of both the poor and middle class, who ‘matter the most for growth via a number of interrelated economic, social, and political channels’.

The IMF finds that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points. Making the poor and the middle class one percentage point richer, it says, can raise GDP growth by as much as 0.38 percentage points.

Richard Murphy, writing for Tax Research UK, interprets the research as effectively saying that wealth makers are those at the bottom of society, not the top.

As the IMF points out, the poor and the middle class tend to consume a higher fraction of their income than the rich. So if more money flows to these segments of society, they will consume rather than save. This will raise demand and boost aggregate growth in the short term.

So, as Murphy writes, reducing inequality means making sure that those who are best able to deliver growth have the opportunity to do so.

Ruby Stockham is a staff writer at Left Foot Forward. Follow her on Twitter

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