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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31 Responses to “Why the rich getting richer is bad for growth”
OldLb
Take Mr Median. Nearly 5K in NI contributions each year.
So instead of giving their surplus money to someone else, it goes into an account in their name.
On McDonalds, I partially agree. Go and ask the customers to pay more. In McDonald’s case, its a non tradeable good, so you can force them to pay more, and it’s then down to the customers, do they pay or do they not. If they don’t then McDonald’s workers lose their jobs.
The workers also lose benefits, they have to pay more tax.
OldLb
What’s the total NI contributions for Mr Median Wage?
OldLb
Doesn’t matter. No employee will get richer if the state spends their surplus income and they spend the rest. They will have no capital at the end of the year.
If you’re an anticapitalist, celebrate your success of lots of poor people. Poor people by definiton have no capital
blarg1987
So you also agree that no employee will get richer if their employer does not pay them more either then?
You can;t have it all one way otherwise your argument is untenable.
The alternative is that you have employees use a pay per use service which could cost more and still be poor which means they need a higher pay package to compensate.
Cole
And Mr Median would end up spending his money on health insurance because there would be no NHS and probably on paying for his kids education because that would have been wound down too. And what kind of lunatic puts a relatively small amount into a stock market investment? Even a financial advisor would tell you that’s daft. Meanwhile we’re subsidising large corporations and failing to tax many of them on their profits.