Policies that give more money to the wealthy in the hopes that it will spread through the economy don’t work and hurt the overall economy more in the long run than giving that same money to the poor would have done.
That was one of the conclusions of an exhaustive study from the International Monetary Fund released on Tuesday that looked at historical data from 150 developed economies around the world over the past several decades.
Although it looked at many things, one of the central tenets examined was the impact of income inequality — how a country’s collective wealth is divided between different income groups.
‘Reaganomics’ under fire
Conventional economic theory in some quarters is to suggest that the best way to stimulate economic growth for everyone is to move capital to the top of the food chain, where it gets invested into businesses that create jobs and tax revenues for all. Known as “trickle down” economics, it’s thought by some to be a better way to expand the economy than directing that income to income groups lower down, who it is believed don’t spend money in ways that might filter through the entire economy.
But the IMF survey turns that thinking on its head, and suggests the numbers don’t back that theory up.
“If the income share of the top 20 per cent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down,” the report reads.
The group calculated that for every one percentage point increase in income share that the richest quintile saw in any given country studied, GDP growth was actually 0.08 percentage points lower in the following five years than it would otherwise have been.
Conversely, if the poorest quintile see their incomes increase by that same one percentage point, the country’s economy expands by a little over a third of a percentage point in the ensuing half-decade.
Growing gap
“Widening income inequality is the defining challenge of our time,” the report notes, echoing recent remarks from the group’s head Christine Lagarde, who constantly pushes world leaders to take action on the issue.
The IMF survey suggests that as the income share of the richest 20 per cent increases, so too does their political influence, which leads to what the group calls a “suboptimal” distribution of resources. They press for political policies tailored towards them — not necessarily ones that would benefit everyone.
When economically disadvantaged people are denied an equal share of economic growth, that gap widens because those on the bottom of the income scale tend to spend a disproportionately larger share of their income on basic needs like health care, education and even food. Their spending tends to boost economic growth and when they have less money, it drags down growth overall.
Policies that favour those higher up the economic ladder “can lead to under-investment in education as poor children end up in lower-quality schools and are less able to go on to college,” the report says. “As a result, labour productivity could be lower than it would have been in a more equitable world.”
The report also suggests wholesale changes to the way developed economies tax their citizens, moving away from current regressive income taxes and towards a more progressive system built on more wealth and property taxes, and a crackdown on tax avoidance and evasion.
