Inequality and Growth

My opinion piece in the AFR this week addressed the so-called 'productivity paradox' of IT. This is that all the investment in IT doesn't show up in the productivity stats.

I made three points. Firstly that there is a productivity measurement problem, secondly that other factors pulling down economic growth mask the impact of IT, and third that the economy wide productivity argument is different to the firm level IT investment decision.

The second point is the relation between inequality and growth, and the conclusion of Stiglitz and others that increasing inequality slows economic growth.

I was horrified to note that the AFR editorial on the same day was headed "Growth will take care of inequality" - so I penned a short letter to the editor.

Unfortunately the published letter only covers the elements where I question the use of top 1% income data rather than a Gini coefficient, and the fact that an earlier article had confused measures based on wealth and income distribution.

Also unfortunately I no longer have the original letter contributed, but I did in that also make the point that the theme of the editorial was simply ignoring the economic result that because extra income by the wealthy is less likely to be spent than extra income to the less wealthy, increasing inequality will lead to lower growth.

In short the causal relationship is that inequality slows growth, and that the benefits of growth per se can be distributed either equally or unequally. Therefore a pro-growth policy needs to start by being grounded in favouring reducing inequality.