Combating the Rise of Inequality

Benedict Clements, co-editor of an IMF book on Inequality, discusses “one of the defining issues of our time”

Inequality is at the forefront of the economic policy debate today in much of the world

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How is the IMF contributing to the debate about rising income inequality?  

On many fronts. First, we are doing new research on the causes of inequality and its macroeconomic implications. Second, we are doing studies on how economic policies and reforms can help countries achieve their equity goals. Our book on Inequality andFiscal Policy is an example of this kind of research.  Third, we are deepening our work on individual countries in the context of our annual consultations with them. 

What’s the importance of this work?

In many countries, achieving more “inclusive” growth—the kind that creates a high number of jobs and does not increase inequality—is a priority.  In this context, policymakers are eager to know the effects of economic policies on inequality and the effects of these policies on economic growth.  As an advisor to countries on macroeconomic and fiscal policies, the IMF has an important role.  In our book, we look at the evidence and provide guidance for policymakers and Fund staff on these issues.  The good news is that there are many reforms that both reduce inequality and boost growth.  Greater use of property taxes to raise revenues and the reform of energy subsidies are two such examples.     

How much has French economist Thomas Piketty’s book fueled this debate?

Piketty’s work has helped draw attention to the issue.  This is just one of many excellent studies that have documented the rise in inequality.  Of equal importance is the work that examines what countries can do to address it.

In your own case, what attracted you to economics and in particular to fiscal issues?

During my college years, I took a trip to Latin America with the Maryknoll Fathers, who work with the poor.  That trip helped show me that economics really matters when it comes to poverty and inequality. I’ve been interested ever since.

Benedict Clements is a division chief in the Fiscal Affairs Department of the IMF. He has worked in the IMF since 1991 and has published extensively on public finance and macroeconomic issues.

Piketty Becomes Superstar Economics Author

Capital in the Twenty-First Century, already a best seller, is an invaluable contribution to how we understand inequality and its possible consequences.

Thomas Piketty—economist from the Paris School of Economics and ground-breaking researcher on income inequality--examines data from more than twenty countries spanning in some cases as far back as the 18th century to assess the dynamics of income and wealth distribution, with a particular focus on the role of capital ownership as a driver of long-run trends in income inequality. He argues that when the rate of return on capital exceeds the rate of economic growth, as it has for most of history, then rising income inequality becomes inevitable. He says that if this rising inequality is allowed to continue unchecked, the results could be deep political and social disruption.

While Piketty notes that inequality has different dimensions across countries, he concludes with a recommendation: significantly increase the progressivity of both income and wealth taxation. Given the extraordinarily globalized market for capital, he further argues that the reach of such taxes must be global as well.

Here"s a quick guide to the book from The Economist: Thomas Piketty’s “Capital”, summarised in four paragraphs

PBS Economics correspondent Paul Solman interviews Piketty for his take on why inequality of wealth has reverted to a lofty level last seen in 19th century Europe.




The Economic Policy Institute and the Washington Center for Equitable Growth host a presentation by Thomas Piketty:




The Guardian on What You Need to Know

CEPR and the Bank of England joint workshop (includes videos)

Reviews:

Paul Krugman, in the New York Review of Books

Larry Summers      Robert Solow        Brad DeLong    Jeffrey Frankel

Mervyn King, former Governor of the Bank of England

Why is it a bestseller?

Brad DeLong (again)    A critique from Daron Acemoglu and James Robinson

Dani Rodrik  "Piketty and the Zeitgeist"                    The Spectator magazine

Financial Times:Piketty’s Data Is Full of Errors     Piketty's Response

and Piketty's longer (10 page) response

NYT: Did Thomas Piketty Get His Math Wrong?

The Economist on Piketty's calculations

The view from France

Deaton's Great Escape

The world is a better place than it used to be. People are wealthier and healthier, and live longer lives. Yet the escapes from destitution by so many have left gaping inequalities between people and between nations. In "The Great Escape," Angus Deaton--one of the foremost experts on economic development and on poverty--tells the remarkable story of how, starting 250 years ago, some parts of the world began to experience sustained progress, opening up gaps and setting the stage for today's hugely unequal world. Deaton takes an in-depth look at the historical and ongoing patterns behind the health and wealth of nations, and he addresses what needs to be done to help those left behind.Deaton describes vast innovations and wrenching setbacks: the successes of antibiotics, pest control, vaccinations, and clean water on the one hand, and disastrous famines and the HIV/AIDS epidemic on the other. He examines the United States, a nation that has prospered but is today experiencing slower growth and increasing inequality. He also considers how economic growth in India and China has improved the lives of more than a billion people. Deaton argues that international aid has been ineffective and even harmful. He suggests alternative efforts--including reforming incentives to drug companies and lifting trade restrictions--that will allow the developing world to bring about its own Great Escape.

Demonstrating how changes in health and living standards have transformed our lives, "The Great Escape" is a powerful guide to addressing the well-being of all nations. 

Deaton argues that the main barrier to progress in poor countries is not lack of resources but bad governments. Yet it is these governments that receive the aid either directly or indirectly. The flow of foreign money undermines governments’ incentives to raise money from their own taxpayers, which in turn requires growth-friendly policies and reformed institutions. Instead it shores up ill-functioning governments, the very misfortune holding back poor countries.


New York Times review

Princeton University press

The Economist

Bloomberg review

Article in F&D magazine

The Damaging Effects of Global Inequality

World Bank economist Branko Milanović has a great introduction to global inequality in his The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality. He uses history, literature, and stories straight out of today’s newspapers, to discuss one of the major divisions in our social lives: between the haves and the have-nots. 

Milanovic reveals just how rich Elizabeth Bennet’s suitor Mr. Darcy really was; how much Anna Karenina gained by falling in love; how wealthy ancient Romans compare to today’s super-rich; where in Kenyan income distribution was Obama’s grandfather; how we should think about Marxism in a modern world; and how location where one is born determines his wealth. 

He goes beyond mere entertainment to explain why inequality matters, how it damages our economics prospects, and how it can threaten the foundations of the social order that we take for granted.

The book, by the lead economist with the World Bank’s research division and one of the world’s leading experts on inequality, was discussed in a three part series in Think Progress:

Part 1:  Inequality: The Global View
Part 2: Five Things You Might Not Know About Inequality
Part 3: Why Rich People Hate Talking About Inequality

See also Finance & Development magazine on inequality.
         Branko Milanovic's article: More or Less
                                 podcast interview on inequality  
          IMF research: Andy Berg and Jonathan Ostry

Inequality may be hazardous to your growth
How inequality affects savings behavior

Branko Milanović talking about inequality research:

Democracy Pays Off

Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoğlu
My rating: 5 of 5 stars

A nation's poverty or prosperity may have as much to do with politics as economics, says Daron Acemoglu.

The MIT professor argues that more democratic countries with inclusive political institutions create sustained prosperity, while “extractive” authoritarian regimes lead toward poverty.

Acemoglu discusses why China is not the exception.

Listen to an interview with Acemoglu: http://www.imf.org/external/podcast/2...

Paying the Price for Inequality

Economists Joseph Stiglitz and Paul Krugman agree on many things. But the two have been at odds over whether economic inequality is holding back the recovery. Stiglitz says it is, and Krugman, while agreeing the inequality is unfortunate, says it is not. "Economics is not a morality play," Krugman observes. See Krugman vs Stiglitz in the New Republic. 

Stiglitz talks about his book, "The Price of Inequality: How Today's Divided Society Endangers Our Future," in the video below.

Stiglitz passionately describes how unrestrained power and greed are writing an epitaph for the American dream.

New York Times review

Review in the Observer

All for One -- F&D magazine on inequality