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Slow growth creates inequality or the other way around? August 26, 2012

Posted by Sverre in : Political economy , trackback

Through the Twitter account of Gudmund Hernes, I became aware of a very interesting and thought provoking piece by Alexander Stille, based on the work of French economist Thomas Piketty. Titled “The heirs of inequality”, it highlights the connection between periods of slow growth and much economic inequality. Looking at the French economy from 1820 until today, and Scandinavian and American economies today, there appears to be a clear correlation. The causality is less clear. Does slow growth make for worse income distribution, does a poor income distribution slow growth, or are both effects reinforcing each other?

One the one hand, growth in the economy has increased in periods of progressive reform, supporting the idea that equality creates growth. On the other hand, support for income distribution seems to decrease in recessions, supporting the idea that growth is important for equality. Psychological research points to an effect called “last place aversion”, through which those that are second-to-worst off are less likely to support redistribution to those that are worse off than themselves.

These are but a few of many thought-provoking points. Some of the last paragraphs are particularly interesting, about the consequences of these insights:

Thus, a slow-growth/high-inequality economy may become a self-perpetuating cycle. But both Stiglitz and Piketty do not think that it must be so. “First of all, the Scandinavian countries, which have the greatest equality, are also among the fastest-growing advanced economies, and take the example of Japan, which has experienced deflation for about 20 years but successfully maintained a decent level of equality and standard of living,” Stiglitz argues.

Piketty believes that the key may lie in making a psychological adjustment to a period of slower growth: “We may need to accept the fact that the post-WWII years of 4% and 5% annual growth were the exception, and that 1% annual growth – after allowing for population growth – is much more the norm.”

Indeed, Piketty argues that our “obsession with growth” merely “serves as an excuse for not doing anything about health, about education, or about redistribution.” And it is an obsession rooted very much in the present. “We forget that for centuries growth was essentially zero,” he writes. “One percent real growth means doubling the size of your economy every 30 or 35 years.”

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