IMF on redistribution and growth

Last month I noticed a piece from the IMF “redistribution, inequality, and growth”.  It came out after my post on “Okun’s leaky bucket” and I was pretty happy to see the piece – as it was actual empirical research stating that the policy trade-offs are more complicated than some grand “equality vs efficiency” policy choice.  As they say in their introduction:

It must be borne in mind that the data are particularly scarce and unreliable for redistribution, even more so than for inequality.  Indeed, one possible interpretation of our results is that the data on redistribution simply do not contain enough information to infer a negative (or for that matter a positive) direct effect.

We should of course be cautious about drawing definitive policy implications from cross-country regression analysis.  We know that different sorts of policies are likely to have different effects in different countries at different times.

What we find is that we should not assume that there is a big trade-off between redistribution and growth

I compare this to what I said:

However, when it comes to directly determining policy about redistribution this use of the leaky bucket has stretched the metaphor too far.  Policy has more dimensions than a couple of synthetic aggregreates (GDP and inequality measures) which get confused for the much broader terms ‘efficiency’ and ‘equity’.

But when it comes to actual policy, policy settings impact upon welfare in a myriad of different ways not captured by this.

And I hear exactly the same sort of stuff.  It implies that, for individual policies, we need to actually think hard about the impact of the policy itself – this supports doing analysis, rather than tarring all policies with the same brush.

However, I have noticed people in New Zealand take this result far too far.  Bernard Hickey went as far as saying (ht Imperator Fish):

Inequality is not only a threat to economic growth, but an opportunity. Politicians can now credibly argue that reducing inequality is more than just about fairness. It can also be a way to increase the economy’s growth potential.

The politics of envy can morph into the politics of growth.

This goes against the very conclusion by the IMF which is:

We need to be mindful about over-interpreting these results, especially for policy purposes

The report stated what economists all already know – policy is complicated, our knowledge is partial and conditional, and as a result when it comes to policy we need to work hard to understand the impact of policy.  The report didn’t say we should go from one oversimplification to another one 😉

  • Rural Johnny

    Policy may well be complicated. Economic policy certainly is, at least to me.

    But principles need not be complicated and it is principles that are too often not evident in the development of policy. A simple principle focused on inequality and redistribution would, in my humble opinion, go a long way to addressing the double sided coin called greed and envy that appears to drive so much social unrest. IMHO.

    • That is already what government does – redistribution is the primary purpose of government. Hence why we have also seen the size of government grow pretty much constantly over the past decade.

      If we actually want to target social ills themselves, we should consider targeting them, rather than broad loosely related principles!

    • Elinor_Dashwood

      What exactly would that simple principle say?

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