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Confronting Inequality: How Societies Can Choose Inclusive Growth
Inequality has drastically increased in many countries around the globe over the past three decades. The widening gap between the very rich and everyone else is often portrayed as an unexpected outcome or as the tradeoff we must accept to achieve economic growth. In this book, three International Monetary Fund economists show that this increase in inequality has in fact been a political choice―and explain what policies we should choose instead to achieve a more inclusive economy.
Jonathan D. Ostry, Prakash Loungani, and Andrew Berg demonstrate that the extent of inequality depends on the policies governments choose―such as whether to let capital move unhindered across national boundaries, how much austerity to impose, and how much to deregulate markets. While these policies do often confer growth benefits, they have also been responsible for much of the increase in inequality. The book also shows that inequality leads to weaker economic performance and proposes alternative policies capable of delivering more inclusive growth. In addition to improving access to health care and quality education, they call for redistribution from the rich to the poor and present evidence showing that redistribution does not hurt growth. Accessible to scholars across disciplines as well as to students and policy makers, Confronting Inequality is a rigorous and empirically rich book that is crucial for a time when many fear a new Gilded Age.
Jonathan D. Ostry, Prakash Loungani, and Andrew Berg demonstrate that the extent of inequality depends on the policies governments choose―such as whether to let capital move unhindered across national boundaries, how much austerity to impose, and how much to deregulate markets. While these policies do often confer growth benefits, they have also been responsible for much of the increase in inequality. The book also shows that inequality leads to weaker economic performance and proposes alternative policies capable of delivering more inclusive growth. In addition to improving access to health care and quality education, they call for redistribution from the rich to the poor and present evidence showing that redistribution does not hurt growth. Accessible to scholars across disciplines as well as to students and policy makers, Confronting Inequality is a rigorous and empirically rich book that is crucial for a time when many fear a new Gilded Age.
- GenresEconomics
192 pages, Paperback
Published January 8, 2019
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Displaying 1 - 6 of 7 reviews
January 20, 2019
A nice, readable presentation of the important empirical work that the three International Monetary Fund (IMF) authors of this book (and their many co-authors) have done over the last decade on rethinking the impacts of inequality on growth and of various policies on inequality. The conclusions represent a radical change for the IMF in many respects, although at points the authors do not appear to take their policy recommendations as far as their empirical evidence would suggest.
I had read many of the papers underlying this book but had missed a number of them so appreciated that the ideas were all brought together. The authors make the reasonable choice to keep their results readable so they mostly present empirical conclusions while showing very little of the data or models that led them to those conclusions. As a result, most economists will want to read the Appendices as well (if not the papers). And most non-economists should not have much problem reading it, although occasionally too much IMF jargon and acronyms still manage to slip through the otherwise relatively clear prose.
On the substance, the book finds that, on average, inequality results in less sustainable growth and lower growth. Redistribution has no direct adverse impact on growth and by reducing inequality actually helps it. Structural reforms (like deregulation) generally increase growth and inequality. Fiscal austerity hurts both growth and especially inequality, with the authors suggesting that it does not generally pass a cost-benefit test because the benefits of less debt are outweighed by the cost of getting to less debt. Monetary expansion reduces inequality.
The book falls in to the genre of "summarizing our research" rather than "surveying the field." As such, it does not present a two-handed perspective but a clear and forceful articulation of a very consistent set of empirical results. That is generally reasonable, but would treat this as one perspective on the question. In particular, all of the evidence is from panel studies of macroeconomic data which is one useful perspective but certainly not the only one. And it is hardly a definitive randomized trial or even as credibly identified as modern micro studies. So a fuller perspective would have to take this as one input together with other macro perspectives, micro evidence and the like.
The authors largely present their work as finding that there is no tradeoff between inequality and growth. But there is some tension between that conclusion and their chapter on structural reforms which finds that almost all of these types of policies boost growth and increase inequality. They never exactly explain how they square that with their overall macroeconomic results.
Also, ultimately we do not care about growth by itself or inequality by itself by how people are doing--the median person, the bottom 90 percent, the mean of log income, or some other fancier social welfare function. The authors, however, consistently present growth and inequality separately without any discussion of how to judge the integration of the two together. When there is no tradeoff that does not matter--if growth goes up and inequality goes down, for example. But what about policies that raise growth and increase inequality? Are they good or bad? Judging this requires combining the two and applying some sort of social welfare function (or prioritization of the different parts of the income distribution), something the authors never do.
Finally, the policy conclusions are radical. The reducing inequality is actually less radical than it looks because the international institutions have actually been pushing that for a while. And the authors shrink from the full conclusion, saying we need market reforms regardless of the empirical results they find for them. Perhaps the most consequential shifts are about fiscal austerity and open capital flows, two areas that the IMF has made some consequential changes in recent years, many of them in part because of the research done by the authors of this book.
I had read many of the papers underlying this book but had missed a number of them so appreciated that the ideas were all brought together. The authors make the reasonable choice to keep their results readable so they mostly present empirical conclusions while showing very little of the data or models that led them to those conclusions. As a result, most economists will want to read the Appendices as well (if not the papers). And most non-economists should not have much problem reading it, although occasionally too much IMF jargon and acronyms still manage to slip through the otherwise relatively clear prose.
On the substance, the book finds that, on average, inequality results in less sustainable growth and lower growth. Redistribution has no direct adverse impact on growth and by reducing inequality actually helps it. Structural reforms (like deregulation) generally increase growth and inequality. Fiscal austerity hurts both growth and especially inequality, with the authors suggesting that it does not generally pass a cost-benefit test because the benefits of less debt are outweighed by the cost of getting to less debt. Monetary expansion reduces inequality.
The book falls in to the genre of "summarizing our research" rather than "surveying the field." As such, it does not present a two-handed perspective but a clear and forceful articulation of a very consistent set of empirical results. That is generally reasonable, but would treat this as one perspective on the question. In particular, all of the evidence is from panel studies of macroeconomic data which is one useful perspective but certainly not the only one. And it is hardly a definitive randomized trial or even as credibly identified as modern micro studies. So a fuller perspective would have to take this as one input together with other macro perspectives, micro evidence and the like.
The authors largely present their work as finding that there is no tradeoff between inequality and growth. But there is some tension between that conclusion and their chapter on structural reforms which finds that almost all of these types of policies boost growth and increase inequality. They never exactly explain how they square that with their overall macroeconomic results.
Also, ultimately we do not care about growth by itself or inequality by itself by how people are doing--the median person, the bottom 90 percent, the mean of log income, or some other fancier social welfare function. The authors, however, consistently present growth and inequality separately without any discussion of how to judge the integration of the two together. When there is no tradeoff that does not matter--if growth goes up and inequality goes down, for example. But what about policies that raise growth and increase inequality? Are they good or bad? Judging this requires combining the two and applying some sort of social welfare function (or prioritization of the different parts of the income distribution), something the authors never do.
Finally, the policy conclusions are radical. The reducing inequality is actually less radical than it looks because the international institutions have actually been pushing that for a while. And the authors shrink from the full conclusion, saying we need market reforms regardless of the empirical results they find for them. Perhaps the most consequential shifts are about fiscal austerity and open capital flows, two areas that the IMF has made some consequential changes in recent years, many of them in part because of the research done by the authors of this book.
September 6, 2019
The tide has turned in IMF. This report by IMF researchers had been accepted by Christine Lagarde and this marked a turning point of its policy. IMF had traditionally focused on overall GDP growth and not how it is distributed.
3 main points:
1. Inequality is harmful to growth, more important than trade openness, political institutions, foreign direct investments, exchange rate competitiveness and external debt. That is postulated to be because poor people cannot build up social capital, and inequality causes political instability.
2. Every policy that raises growth also increases inequality as it creates winners and losers. Domestic Finance reform, tariff reduction, collective bargaining and rule of law increase growth more than inequality; current account and capital account liberalisation, as well as network reforms increase inequality more than growth. Capital Account liberalisation cut labor share of income! So governments must foresee that and temper its effects a priori, and/or use taxes to redistribute.
3. Redistribution does not impede growth except when extreme.
4. Robots will make inequality worse. Capital owners will rejoice. Even in the scenario that they complement the knowledge worker, only those skilled people will benefit. Unskilled labor is doomed.
Some Cure is worse than the sickness:
1. Freeing capital flow increases inequality because the rich is better equipped to take advantage of the foreign capital inflow; subsequent outflow also harms the poor more.
2. Austerity decreases income, increases unemployment and increases inequality.
Really useful solutions:
1. Provide access to health care and education to generate equality of opportunity.
2. Improve access to finance for the poor before letting in capital flow.
3. Expansionary monetary policy decreases inequality.
4. Redistribute!
3 main points:
1. Inequality is harmful to growth, more important than trade openness, political institutions, foreign direct investments, exchange rate competitiveness and external debt. That is postulated to be because poor people cannot build up social capital, and inequality causes political instability.
2. Every policy that raises growth also increases inequality as it creates winners and losers. Domestic Finance reform, tariff reduction, collective bargaining and rule of law increase growth more than inequality; current account and capital account liberalisation, as well as network reforms increase inequality more than growth. Capital Account liberalisation cut labor share of income! So governments must foresee that and temper its effects a priori, and/or use taxes to redistribute.
3. Redistribution does not impede growth except when extreme.
4. Robots will make inequality worse. Capital owners will rejoice. Even in the scenario that they complement the knowledge worker, only those skilled people will benefit. Unskilled labor is doomed.
Some Cure is worse than the sickness:
1. Freeing capital flow increases inequality because the rich is better equipped to take advantage of the foreign capital inflow; subsequent outflow also harms the poor more.
2. Austerity decreases income, increases unemployment and increases inequality.
Really useful solutions:
1. Provide access to health care and education to generate equality of opportunity.
2. Improve access to finance for the poor before letting in capital flow.
3. Expansionary monetary policy decreases inequality.
4. Redistribute!
July 10, 2019
Alright, in fairness I didn't read this whole book. I read through the conclusion and started trying to understand the data appendix but got lost pretty quickly. That being said, everything prior to that was super accessable and full of information. I think that what I appreciated the most was the focus on things that could be done to solve these issues instead of simply identifying the problem. I give it 4 stars instead of higher because I found the formatting of the book a bit irritating; a paragraph on one page would refer to tables or charts pages earlier or later so I ended up doing a bunch of flipping back and forth. Maybe I'm just being picky...
July 11, 2019
Good review on how inequality can affect long term growth besides the usual channels such as political uprising by the people left behind by current economic forces such as globalization and technology. Interesting to see how institutions such as the IMF are starting to look as inequality as something important to take into consideration in public policy decision making and therefore leaving behind the theoretical framework that inequality is one of the consequences of free markets and liberalism.
October 31, 2020
This short volume is dense with information, yet easy to digest. It makes a compelling empirical argument that economic growth and limiting inequality are not conflicting goals. The centerpiece of this case is looking beyond the direct effects of certain policies on economic growth to the duration of growth spells. The finding is that income inequality--as measured by the Gini coefficient--is associated with shorter, less robust periods of economic growth.
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April 19, 2019339.2 O857 2019
Displaying 1 - 6 of 7 reviews