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
31 Responses to “Why the rich getting richer is bad for growth”
OldLb
Note. I have not said anything about the insurance companies and a capital based pension. Pensions as I propose are nothing to do with insurance.
However, insurance companies do not as a whole invest in the stock market. They invest premiums in bonds, because the state insists on it. First to match assets against projected liabilities. Secondly because the state wants to borrow on the cheap. Force people to lend and you dictate the interest rate. Cheap lending to the government at your expense with higher premiums. Lastly because its premiums up front for payouts later.
So what is wrong with an insurance company matching assets and liabilities? Or would you rather they took your premiums as profits and not paid out on their side of the deal?
blarg1987
As I said earlier which you did not reply to:
“Last time I checked car, travel and household insurance is exactly the same I do not hear you screaming from the roof tops about that.”
But you keep complaining about state insurance policies.
Finally not necessarily true, insurance premiums increased after the financial crash, as the insurance industry admitted that it has lost money due to the financial crisis. in effect admitting it had invested in the stock market.
Secondly the insurance industry does not match its assets and liabilities, if it had then premiums would not have gone up after we had heavy snow a few years ago as it would have already covered that liability which it failed to do so.
Faerieson
This is in fact increasingly widely believed to be the case, basic economics would seem to support the premise. That is to write, that if those at the bottom cannot afford to spend enough to support the ever-inflated lifestyles of the uber-wealthy, then even many of those at the top of the wealth pyramid may not continue to ‘thrive.’
Current trends towards the accelerated widening of the wealth divide and the increased concentration of far-beyond-obscene volumes of wealth for a diminishing number of individuals conforms precisely to this model. The fact that such partial interests as those of the IMF might, in any way whatsoever, be connected to this report should be of serious concern to everyone. But, whether this is informs wider debate or not, the current economic pathway is unsustainable.
Cole
LB always gets personal and insists anyone who opposes his daft views must be on the take.
Cole
LB always gets personal and insists anyone who opposes his daft views must be on the take.