Before you read on: in 2011 two IMF economists studied long spells of fast growth. What did they find in countries with more equal incomes?
Andrew Berg and Jonathan Ostry found that more equal incomes went with longer growth spells. By their estimate, if Latin America cut its inequality to halfway between its own level and emerging Asia's, its growth spells would be expected to last more than twice as long.
- The question
- Is a wide gap between rich and poor a problem in itself, or should policy aim at ending poverty and raising growth?
- It matters
- John Rawls, A Theory of Justice (1971); Joseph Stiglitz, The Price of Inequality (2012); Thomas Piketty, Capital in the Twenty-First Century (2014 in English); Richard Wilkinson and Kate Pickett, The Spirit Level; IMF economists Andrew Berg and Jonathan Ostry
- Focus on poverty and growth
- Arthur Okun, Equality and Efficiency: The Big Tradeoff (1975), who favoured redistribution but stressed its costs; the philosopher Harry Frankfurt, On Inequality; Gregory Mankiw, Defending the One Percent (2013)
- When
- From Rawls and Okun in the 1970s; sharpened in the 2010s
What the argument is about
Poverty is about how little the worst off have. Inequality is about the gap between people, however well off they are. A country can cut poverty while the gap widens, if the rich gain faster than the poor. The debate has two halves. One is moral: is a gap unjust in itself? The other is economic: does a wide gap harm growth, or does closing it cost more than it gains?
The two cases
It matters
The case
John Rawls argued that social and economic inequalities are just only if they work to the greatest benefit of the worst off. He also held that concentrated wealth lets the rich dominate politics. Joseph Stiglitz argued that much of the gap in the United States comes from rent seeking, with elites using connections and political influence to take a larger share of income. In his view this weakens growth and misdirects talent. Thomas Piketty argued that when the return on wealth, such as rent and profit, outpaces economic growth, inherited wealth pulls away from earned income.
The evidence it points to
Berg and Ostry linked more equal incomes to longer growth spells. Federico Cingano of the OECD found in 2014 that when the bottom of the income scale fell further behind, later growth suffered, partly because people from less-educated families built fewer skills. Wilkinson and Pickett found that more unequal rich countries have worse health and social problems, from mental illness to homicide.
Focus on poverty and growth
The case
Harry Frankfurt argued that equality has no moral weight of its own. What matters is that each person has enough for a decent life, so the goal is to end poverty. Arthur Okun backed some redistribution, but warned that taxes and transfers blunt the incentive to work and cost money to run. Gregory Mankiw argued that high earners such as successful entrepreneurs largely earn what they add, and that buyers gain too.
The evidence it points to
The World Bank estimates that people in extreme poverty, on its $3-a-day line, fell from about 2.3 billion in 1990 to about 831 million in 2025, mainly through growth in East and South Asia. Robert Barro found in 2000 that inequality went with slower growth in poorer countries but possibly faster growth in richer ones. Peter Saunders, writing for Policy Exchange in 2010, retested The Spirit Level's data and argued that few of its claims held up.
Ideas from the debate
Can you name the four ideas, two from each side, at the heart of the debate?
Rawls's rule that social and economic inequalities are fair only if they bring the greatest benefit to the least advantaged. He asked what people would choose without knowing their own place in society.
Can you think of an example?
Higher pay for surgeons passes the test if it draws in enough skill to leave the poorest with better healthcare.
Gaining income by capturing a bigger share of existing wealth, through lobbying or connections, instead of by creating new value. Stiglitz saw it as a main source of top incomes.
Can you think of an example?
A firm lobbies for a rule that keeps rivals out of its market, then raises its prices.
Frankfurt's view that the moral aim is for everyone to have enough. How one share compares with another carries no weight in itself.
Can you think of an example?
If every family can afford a decent home, food and healthcare, this view sees no duty to narrow the gap with the very rich.
Okun's picture of redistribution as carrying money from rich to poor in a bucket with holes. Some is lost through running costs and weaker incentives to work.
Can you think of an example?
A tax raises £100 from high earners, but after running costs only £80 reaches poorer families. If both groups also work a little less, the economy's total income shrinks too.