A recently published cross-country comparison by the International Monetary Fund that shows income inequality slows growth, seems easy to misconstrue by advocates of income redistribution. With the U.S. economy having greater income inequality but growing faster and more sustainably than Europe and Japan, how can cross-country comparisons, at least ones relevant to the U.S., find that economies with more equally distributed incomes grow faster? The study singles out countries that redistribute income more than the U.S.—France, Germany, and the Netherlands, for example—and cautions that redistribution of this magnitude slows growth, but questions the statistical significance of this conclusion because of a scarcity of data.
The study shows that countries with economies that naturally distribute incomes more equally grow faster and more consistently than those that achieve equality through redistribution. It’s no surprise, for example, that countries ruled by dictators who oppress their economies distribute income more unequally and grow more slowly. And in a world where the incomes of talented workers are growing faster than the economy in total, saturating an under-educated population with education can increase the share of higher scoring workers, more evenly distribute incomes, and accelerate growth. Similarly, if the U.S. could find a way to increase the productivity of its least productive workers, incomes would be more equally distributed and the economy would grow faster. Unfortunately, no one has found a cost-effective way to do that.
Redistribution of income, on the other hand, likely slows growth by reducing the payoffs for success and slowing the accumulation of equity needed to finance innovation. A narrow range of policy differences, however, makes it difficult to measure the effects of redistribution with statistical significance. The study compounds the problem by differentiating between economies with high and low levels of income redistribution and analyzes each group separately.
So while the study admits that economies with a high degree of income redistribution like France, Germany, and the Netherlands grow less sustainably than the U.S., and cautions that redistribution as a policy for achieving greater income equality may hinder growth, it nevertheless concludes that countries with economies that naturally distribute incomes more equally grow faster. That conclusion may be relevant to developing economies but is largely irrelevant to the U.S., which currently has inadequate means for achieving greater equality other than through higher levels of income redistribution.