Tuesday, January 22, 2013

Is Inequality Holding back the Recovery?

In the New York Times, Joseph Stiglitz says "Inequality is Holding Back the Recovery,"  but Paul Krugman is skeptical and says there no reason to expect that inequality will affect short-term economic growth.  Using data from the Organisation for Economic Cooperation and Development, here is the relationship between inequality (the Gini coefficient) as of about 2005 and economic growth between 2009 and 2011--that is, since the bottom of the recession.

 It looks like the more unequal countries have recovered more rapidly.  But most of the countries that combine strong growth and high inequality are also poor (relative to the OECD nations as a whole), so they have more room to grow.  As I said in an earlier post, the amount of stimulus (government spending growth) in 2005-7 also seems to have affected economic growth in 2009-11.  If you use all three of these factors to predict growth, you get

Gini                  .01            0.1
Stimulus           .34            1.4
wealth             -.05           -2.2

Of course, that's not proof that inequality makes no difference:  the confidence interval (range of plausible values) is large enough to include pretty substantial effects, both negative and positive.  But there's no sign that countries with more inequality have had a slower recovery from the recessions.   So this evidence comes down on Krugman's side. 

Notes:  "Wealth" is the logarithm of per-capita GDP, as of 2009.  For "stimulus," see my earlier post on the subject.  Greece is an outlier on economic growth, but it doesn't make much difference to the results, since it's pretty much average in terms of the three predictors. 

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