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The link between economic inequality and growth

economics

(Michael Hrenka) #1

What is the actual relationship between economic inequality and growth? it would be nice to have a precise formula that could tell us the best level of inequality for economic growth, but economic theories disagree on the effects that inequality should have on growth (apart from the fact the research in this area started out with the question of how growth has affected inequality), so there is a clear need for actual empirical data.

The best summary I’ve found on this topic is the article

and its accompanying paper.

It summarizes its findings this way:

studies that look at the longer-term growth implications find that inequality adversely affects growth rates and the duration of periods of growth, while those that focus on short term growth find that inequality is not harmful and may be associated with faster growth. Furthermore, studies that look at the impact of inequality on differ-ent levels of the income distribution have found that inequality is particularly bad for the income growth of those not at the top.

Though that summary is a bit imprecise, and preceding conclusion provides a more detailed account:

Economists Daniel Halter and Josef Zweimuller of the University of Zurich, and Manuel Oechslin of the University of Bern identified methodological differences in the papers that find a positive relationship between inequality and growth and those that find a negative relationship. Specifically, those papers that examine inequality’s effect on growth over time within countries tend to find a positive relationship but those that use cross-sectional comparisons find a negative relationship. These results imply that a study’s methodological choices will determine which effects dominate the results and that there are different effects related to inequality driving short-term and long-term patterns in growth. They posit that the time-difference methods are detecting short-term positive effects to growth, while the cross-sectional methods pick up the long-term negative effects for growth when there is persistently high or growing inequality.

That kind of conclusion is confusing since it’s not obvious why different methodologies should yield different results. Also, consistent short-term behaviour over time should translate into a long-term behaviour of the same kind. In fact, a more recent study has found a positive correlation between inequality and growth by analyzing the development of 10-year averages over time. How that result can be interpreted to mean that inquality is still bad in the long-term is not clear, but there are clearly issues with methodology with any studies on this topic.

One Forbes article summarizes a presumed negative long-term effect that high inequality has had on the OECD countries:

http://www.forbes.com/sites/eriksherman/2014/12/09/income-inequality-hurts-economic-growth/#eb6311b61d63

Even the OECD agrees with that general conclusion.

Does that mean that there is currently a stronger consensus for the idea that economic inequality hurts growth in the long run? However, this consensus doesn’t seem to be unanimous. That’s probably a sign for the situation being more complicated than we expect it to be. Perhaps we need to develop finer measurements for inequality, to find out what’s really happening.

Nevertheless, let’s just assume that we have a level of inequality that’s a bit too high, and that the economy would profit from reducing it. But how should inequality be reduced? This is where multiplier effects come into play, which measure the effectiveness of redistribution policies. It turns out that the multiplier effects for direct cash grants are particularly high, especially if the recipients are very poor. This would mean that a UBI would be a comparatively effective way of spending money for reducing inequality and boosting the economy at the same time, as the following article demonstrates:

But where should that money come from? Let’s assume that we care about growth a lot, then we should use ways of taxation that don’t impede that growth excessively. The article “What Is The Evidence on Taxes and Growth” claims that there is a clear hierarchy of taxes when it comes to their negative effects on growth, with the latter being less harmful:

  1. Corporate income taxes
  • Personal income taxes
  • Consumption taxes
  • Corporate property taxes
  • Personal property taxes

This suggests that a shift from income taxes towards property taxes would be quite beneficial to the economy, in particular, if the tax money was used for expenditures with high multiplier effects, like an unconditional basic income. Such a transition would defintely be hard, since taxing property is generally more challenging than taxing income. An interesting exception to that rule would be a Land Value Tax because people can’t hide their ownership of land by putting it into a safe in a tax haven. Economists generally agree that a LVT would be pretty close to optimal, but the idea is mostly ignored by politicians.

The order of “badness” of taxes is at least mildly consistent with the idea that inequality hurts the economy. The inequality of personal property is the highest, so this fits the idea that taxing personal income would both reduce inequality and hurt growth the least. Using a LVT would probably even have better effects, while also being more practical. But in that case the question remains what to do about shares of corporations and other investments that aren’t captured by a LVT.

What’s still missing is information on the optimal levels of

  • taxation
  • inequality
  • height of a universal basic income

apart from the question that it’s not clear what we should optimize those values for? Growth? Progress? Wellbeing? And how should we measure those?

Anyhow, the main focus should be to first get a more solid understanding of the relationship between economic inequality and growth, even if the latter doesn’t happen to be exactly what we want or need. Are there perhaps any economic computer models that could shed some new light on this question?


#2

what means growth? we learned to think in neoliberal terms of economy, so much that whenever economy is the topic, neoliberalism silently is implied. to me economy is everything concerning our devision of labour, distributing our output and sharing our merits and values. in this keynote address http://basicincome.org/news/2017/01/video-time-basic-income-scotland-keynote-bien-scotland-launch/ guy standing distinguishes work and labour. and he said that whenever people benefit from UBI ( in the pilot expermients) the observation is, that they work more for things they really care. this is a form of growth while reducing inequality. in that particular case it is the growth of personal commitment and personal value for all people involved. so imho it is not the important question, if we will have more growth with more equality - because we will have!- the most interesting question is : what kind of growth we will gain. [quote=“Radivis, post:1, topic:1789”]
apart from the question that it’s not clear what we should optimize those values for? Growth? Progress? Wellbeing? And how should we measure those?
[/quote]

yes, we should concentrate on these questions.


#3

What do you think of the argument that UNIVERSAL BASIC INCOME CAN’T WORK ON ITS OWN ? The author argues UBI should get linked to certain conditions as for example educational or similar programs in favor of developing individual abilities. At first I didn’t like his proposal but hindsight I think he certainly got a point there.
Along the way the article indicates that UBI is about to become a seriously discussed topic in the US.


#4

quotes from:
1.


2.

In germany the UBI is called: unconditional basic income and the whole idea based on a new image of humanity and emancipation from heteronomy.
(1.)

Human beings and human societies need to continuously develop in order to thrive. We are naturally inclined to be in a state of constantly striving for increasingly greater goals and achievements. A person who is not committed to a purpose in life, who has nothing to live or die for, becomes numb. There is nothing worse than giving something to someone before they actually want for it, as it blocks their very will to act in pursuit of their desired outcomes.

This is the case we can observe today in our world of employment. If somebody loses his job, he loses the structure of his workday, his colleagues and with that social contact and the authority from his employer who told him every day what he has to do. With this loss many people become depressed. But the same things happened always to people who retire. So this is not really a new phenomenon of our modern world of unemployment but a very common observation since people retire. And yes, those people always have problems, no society ever really addressed. I can´t recall organizations which force retirees to thrive and avoid to become numb while holding back their money if they are not willing to. But since many societies are getting older shouldn´t we address this problem first?
No, I don´t think so, because I think it is a wrong assumption, that people need pressure and conditions, even incentives. People need freedom to find their own way. And urgently much more freedom, because they lived a life of heteronomy and they are accustomed to it and this “normal” way of life spoiled many of them in a way, that they never learned to develop their own structures, their own wishes, what they want from life and even their own thoughts. Many people depend on others, to tell them what to do and what to think. A real unconditional basic income, high enough to give people the freedom to participate in our modern culture and technology ( which is expensive) and high enough to free them from existential fears and financial deprivations of any sort is a revolutionary idea for emancipation. Retirees who overcome the first shock of retirement and develop a meaningful life for themselves are beneficial to society, given that they never suffer from financial problems again. They often work more hours a day than in their former job, if you count every activity others benefit from and every activity for personal development as “work”. They have much more time to read good books, to travel, to attend cultural events, to learn a new language or to take dancing lessons. Many of them are even better parents for their grandchildren, because they are free to give them time and attention and they got rid of the stress of the rat race.

(1.)

So if you take away the thirst for money, there will be droves of people out there who won’t have much to motivate them to develop themselves. Not knowing what to do with their time will make them miserable and drive them crazy. This can actually increase drug intake and violent mayhem.

Yes, many retirees are violent drug addicts.:thinking: Probably…But here the author contradicts himself:
At first he said: "We are naturally inclined to be in a state of constantly striving for increasingly greater goals and achievements."
And then he said: “So if you take away the thirst for money, there will be droves of people out there who won’t have much to motivate them to develop themselves.” How does that fit together? When we are naturally inclined, then we are intrinsically motivated, but the “thirst for money” is extrinsic motivation.
(1.)

But people should also be able to strive for what they are passionate about. They just shouldn’t have to work in order to pay for shelter, food, clothing, and so on; these things will be provided for. But that doesn’t mean people will be idle. Musk foresees that UBI will give people time to do other things, more complex things, and more interesting things. Others believe that without the uncertainty about being able to pay for rent and other basic necessities, people will be unmotivated to advance themselves, nor will they spend their free time productively. Research has corroborated these latter notions.

Really? Guy Standing ( in the keynote address I mentioned in my former post) and other UBI advocates say just the opposite. But I followed that research -link the author recommended and found out what he meant:
(2.)

According to professor emeritus at University of Connecticut Sam Witryol, who pioneered research on what drives motivation,“Motivation is part of curiosity. What sparks curiosity can be classified into three different categories: complexity, novelty and uncertainty. They form the hierarchy of curiosity where uncertainty is the most powerful motivator.”

But also:
(2.)

But Witryol cautions, uncertainty is only useful in doses, too much overwhelms and kills motivation.

And:
(2.)

University of Chicago economist, Steve Davis measures uncertainty in the economy. He found that, since 2008, the recession and political disfunction doubled policy uncertainty in America.
He found large, post-recession uncertainty increases in Europe and China, too. The uncertainty he measured is correlated with depressed growth and employment. This highlights an important distinction. Uncertainty that can be overcome enhances growth—but too much depresses it.

Isn´t life itself uncertain enough? Do we really need other people to provide us with problems to solve? And the Professor tells us about three categories of curiosity, of which “uncertainty” is only one.

We are humans with an ancient default setting, that makes us believe we need leadership in a top down way, that we need incentives, hierarchies and authorities to force us to strive and we cling to this belief even if pilot studies for UBI teach us the opposite and even if we observe with ourselves that to be intrinsically motivated is one of the best experiences in our lives. Why is it so hard for us, to grant every human being this experience? And who are we to treat other people like children and circus animals who have to be forced into a specific direction in their life? And who are we to know what is the best life for others?

With your first intuition you were on the right track. If UBI should be attached to conditions, it will be nothing better, than what we have now with our old- school social security systems and it would lack the major visionary aspect: the emancipation from heteronomy. UBI is the beginning of a new image of humanity that alienates many. What if an “Unconditional” Basic Income will teach us, that all the good goals the author want to achieve with the help of conditions and coercion will only emerge with freedom and without coercion, incentives and conditions…? Then we will have to rethink a lot of the flaws and beliefs of our past. “The thirst for money” as the author suggested, is not a beneficial motivation, it is one of the most destructive we should overcome when we want to develop a better future.

Thank you, @Beckett for your interesting suggestions and links and welcome to the fractal future forum!


#5

Three Notes in Response:

I basically agree with you in as far as UBI in general is concerned, and I can follow you that it should be unconditional.

UBI holds a key position in contemporary political strategies because large parts of today‘s labour will be substituted for machinery –and apparently rather sooner than later.
In addition it is as well the beginning of "a new image of humanity and emancipation from heteronomy“. But, as that it primarily is a most significant part of a centuries-old narrative, and it remains to be until it will be fully realized. Don‘t mistake me, I don‘t think it‘s illusionary. All I say is that UBI, no more and no less, is another 'chapter‘ in the 'book‘ of 'emancipation‘.
zanthia:
"We are humans with an ancient default setting, that makes us belive we need leadership in a top down way (…) and we cling to this belief (…) even if we observe with ourselves that to be intransically motivated is one of the best experiences in our lifes“.

Well, I don‘t believe in leadership and coercive authorities and hierarchies and I very well know the happyness of flow that is based on intrinsical motivation. But, rather than what we individually believe in and experience, we have to take into consideration the general conditions we live in. Even if a majority votes for unconditional UBI we‘d still be flawed by ancient default settings, and damaged by all kinds of deeply experienced heteronomy. In other words: there will remain a gap between how it should be and how it actually is. Individuals can easily bridge this gap –and always could. But, matter-of-factly looked at the devil is in the details… UBI will shorten that gap.

As political transhumanists we should anticipate the future not only in terms of ideals, we rather strategically should stick with the appeal made by participants of the Global Future 2045 Congress to the UN Secretary-General in 2013:

"The world stands on the threshold of global change. Ecological, political, anthropological, economic and other crises are intensifying. Wars are waged, resources wasted senselessly, and the planet is being polluted. Society is experiencing a crisis of goals and values, while science and technology are providing unprecedented opportunity for advancement. National leaders remain focused on short-term internal stability, without paying sufficient attention to the opportunities for the future of civilization.
“Humanity essentially faces this choice: slide into the abyss of global degradation, or find and realize a new model of development, a model capable of changing human consciousness and giving new meaning to life.”

UBI, even if at first on conditions only, is the most significant part in making transhumanism mainstream-compatible. As the digitalization of our economy keeps on changing societies UBI will be implemented one way or the other, if unconditionally just the better. Right now we should not only point out its merits but in addition its crucial position in order to secure a future that is worth to be called one.


#6

the “problem” you pointed out, the UBI could definitely cause, is a serious one. but it is not a new problem, it is just a new focus on an old problem we already had with retirees and unemployed persons. and i think it is easy solvable with the UBI itself. if many people will gain the freedom and room for creativity, they will create new jobs and others could participate. if those ideas for education and personal development, the author wants as a condition for UBI, will be instead free offers for education and training, many people will freely attend these courses. we don´t need paternalism to make this world a better place. we had too much of it in the past and that is why this humanity is so screwed up.


#7

I didn’t point out any “problem” caused by UBI. Instead I wrote: “UBI will shorten that gap” (that exists anyway). So we agree on that.


(Michael Hrenka) #8

Let’s step back a bit and consider the question I posed in the opening post:

I think that prosperity is most meaningfully measured by the number of options we have. If I have more money, I can do more things than if I have almost no money - all else being equal (which it never is).

While individuals may measure their own prosperity by the number of options they can choose among, how does a society measure its own prosperity? Would that be the sum of options of its constituent individuals, or do we also count the options of groups of persons? And what would it mean for a group to have an option? Those are hard questions, but I think its underlying approach points to a better way of measuring what we actually want to measure.

In any case, economics would become the science of increasing the number options in the most efficient way: Maximize options increased per resources invested.

An unconditional basic income would help a lot for that purpose, since most meaningful options can already be fulfilled with a rather modest amount of money. If I have an income of 20000$ per year, instead of 10000$ per year, much more new options become available compared to the situation that my income rises from 90000$ per year to 100000$ per year. Usually, option increases face diminishing returns. That’s why redistribution of resources makes economic sense. A higher overall or average number of options increases the freedom and dynamism of the system, helping it to find new solutions to problems that couldn’t easily be fixed with the old distribution of options.

According to this argument, inequality should reduce growth (of options). But of course, incentives also matter, though these are a very complex topic, as is seen with the discussion of intrinsic motivation versus extrinsic motivation. A completely egalitarian distribution of options might be optimal in the sense of avoiding diminishing returns, but it would also destroy all extrinsic motivation. What effects would that actually have? And why? I think people need to have the feeling that they can effectively move towards achieving their own goals. Doing so by accumulating money in order to use that for the pursuit of one’s goals is a strategy that’s usually effective and doesn’t require any exceptional skills (such as superior charisma that would enable a person to convince others to do what he wants regardless of material compensation). It’s a robust failsafe approach, if one isn’t willing to try out riskier, harder, or more creative approaches for pursuing one’s goals. Allowing people to increase their monetary wealth has the advantage of not completely eliminating one particular source of motivation and options.

An unconditional basic income would provide a healthy middle ground between excessive inequality and excessive equality.