The IMF's Ostry, Berg and Tsangarides have published an article that should have a major impact on policy-makers and rejoice left-wingers: Redistribution, Inequality, and Growth. That study, all things being equal, should be accompanied by the same trumpeting as the Growth in a Time of Debt paper by Reinhart and Rogoff which was hailed by right-wing pundits as the intellectual justification of austerity.
The difference between the two studies, however, is huge: the IMF uses verifiable data whereas Reinhart and Rogoff didn't make their data available until years after the publication of their non peer-reviewed article. When the data was finally reviewed by Herndon Ash and Pollin in Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff, it was found that the celebrated paper was plagued with "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period."
The IMF study took a look at before and after-tax Gini coefficients, a measure of inequality. Three (simplified here) main conclusions are reached:
1) more unequal societies redistribute more
2) lower inequality is fosters faster and more durable growth
3) redistribution doesn't hamper growth unless said redistribution is extreme
The interaction between these three points can be summed up quite simply: "contrary to the big trade-off hypothesis, the overall effect of redistribution is pro-growth, with the possible exception of extremely large
redistributions." The trade-off between equality and efficiency, the intellectual justification for limiting government intervention, doesn't stand empirical scrutiny.
To sum up, Herndon Ash and Pollin tell us that GDP growth is not significantly different below and above 90% while Ostry, Berg and Tsangarides conclude that moderate government redistribution of wealth fosters growth. This means that, unlike what was generally previously thought, when the government cuts the cake and redistributes it, the cake (or pie, whatever metaphor you prefer) actually gets bigger and NOT smaller.
European leaders should take good note of those findings instead of promoting austerity as the one-policy-fits-all solution to all economic problems.
The difference between the two studies, however, is huge: the IMF uses verifiable data whereas Reinhart and Rogoff didn't make their data available until years after the publication of their non peer-reviewed article. When the data was finally reviewed by Herndon Ash and Pollin in Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff, it was found that the celebrated paper was plagued with "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period."
The IMF study took a look at before and after-tax Gini coefficients, a measure of inequality. Three (simplified here) main conclusions are reached:
1) more unequal societies redistribute more
2) lower inequality is fosters faster and more durable growth
3) redistribution doesn't hamper growth unless said redistribution is extreme
The interaction between these three points can be summed up quite simply: "contrary to the big trade-off hypothesis, the overall effect of redistribution is pro-growth, with the possible exception of extremely large
redistributions." The trade-off between equality and efficiency, the intellectual justification for limiting government intervention, doesn't stand empirical scrutiny.
To sum up, Herndon Ash and Pollin tell us that GDP growth is not significantly different below and above 90% while Ostry, Berg and Tsangarides conclude that moderate government redistribution of wealth fosters growth. This means that, unlike what was generally previously thought, when the government cuts the cake and redistributes it, the cake (or pie, whatever metaphor you prefer) actually gets bigger and NOT smaller.
European leaders should take good note of those findings instead of promoting austerity as the one-policy-fits-all solution to all economic problems.
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