My intuition here is that there exists an equality-growth possibility frontier sonewhere out there in the vast policy space, but that no real-world country is anywhere near it.
I think a big problem with this post is that you don’t distinguish between the different causes of inequality. For example, as appears to be the case, in, for example, Russia if inequalities because resources are concentrated among a few people who are close to the government or have the right political connections and are able to use these contacts to remain wealthy and perhaps even keep their children wealthy then obviously, this is not going to incentivise productive behaviour since productive behaviour has very little to do with becoming wealthy. On the other hand, if you have a good market economy, where people are wealthy only because of inheritance or because they themselves have done economically productive things. Then this creates the right incentives.
Also, I don’t think you grapple with just how revolutionary the possibility that increasing taxes on the rich has no effect on economic growth would be. If redistribution is not a leaky bucket, then you could just increase welfare by indefinitely increasing taxes on the rich and spending it on government priorities, or just giving it to the poor, which is obviously impossible and clearly a mistake.
Clearly taxes have to have some effect on the level of effort. People are willing to put in otherwise 100% income tax would work, which is obviously not possible. Empirical analysis is good and all, but you can’t just totally ignore theory. I’m not even getting into effects from the activities of the rich, like the fact that most people working in research and development are high income earners, and reducing effort by them leads to negative externalities in the form of ideas not being discovered. A few studies that have ambiguous results with many studies, giving conflicting results is just not sufficient basis for throwing out such a basic principal as that taxing something gets you less of that thing.
Also, part of the issue is that these ambiguous results can be easily explained if it simply that the effect of increasing the taxes on the rich is simply small enough not to be easily noticed, and it’s even defensible, although unlikely to think that perhaps on current margins, decreasing inequality has no effect what seems absolutely crazy is the idea that inequality has nothing to do with economic growth as that would imply that if the government enforced total equality between everyone, so that no one was economically better off than anyone else, then this would have no effect on growth, which seems at least on theoretical grounds to be absolutely ridiculous and very, very unlikely.
I do what I can with the existing research. There’s just not a hidden trove of studies and meta-analyses that look specifically and explicitly at what you mention when gesturing at different “types” of inequality. But sure, I think it’s wholly unobjectionable to say that inequality due to rent-seeking, politics, and resource wealth is different from inequality that stems from the free market process.
Still, the papers that are focused solely on the developed world, and which control for corruption etc., should implicitly capture what you speak of. And I guess they partly do when it comes to non-linear effects, with the threshold being much lower in developed countries than developing ones.
Re: taxation, where do you see me saying extreme taxation should have no effect? I’m just looking at what actually happens in the real world, which is moving taxes up or down a bit (the shifts were slightly larger in that OECD paper, which looks specifically at major tax cuts). Obviously, going from zero taxation to 100%, or vice versa, would have ginormous effects. Who’s saying otherwise? I’m looking at a wholly different (and much more policy relevant) question.
Okay, looks like I got carried away because of the title of your post. As I understood you to be arguing that inequality has no effect on economic growth rather than arguing that on current margins, inequalities unlikely to have any effect on economic growth. I agree with the second one, or at least think it’s quite plausible. Although now I am wondering how your results can be reconciled with, for example, Jones 2025, who argues that actually because of the effect on discovering new ideas, income tax on the rich should potentially be actually negative and the lodes of studies by conservative economists arguing for a revenue maximising tax rate in the range of 40 to 70% as that would seem to predict that we should notice the effect on current margins, although to be fair, there are also lots of studies by liberal economists suggesting that the revenue maximising rate might even be above 80%. In which case it’s not surprising that we don’t notice it on current margins or at least not super surprising. I also do think that the inability of current studies to do much to distinguish between income inequality due to natural resources and rent extraction and income inequality. Due to the free market makes their conclusion that inequality has no effect super questionable. BTW, I edited the comment. I wrote at the beginning of this thread before realising that you had already replied, so my original comment might have given you a misleading picture of my views as I realise that I did not make it clear that I do find it believable that the effect on growth is just too small to be noticed on current margins. I also probably was a bit too fiery in my original comment on account of having a bad day. Sorry if I ended up being rude on account of that. Also, I was a bit too incredulous because I thought you were implicitly arguing that existing inequalities are not necessary for growth instead of just arguing that we can decrease inequality a little without noticeable effects on growth.
I’m going to give a bit of a “just-so” story here, but:
> The negative effect of inequality on growth appears stronger in developing countries. In richer economies, the relationship is weaker or sometimes positive.
> inequality measured after taxes and transfers is associated with more negative growth effects than inequality measured before fiscal redistribution.
Both of these might be neatly explained by the difference between rent-seeking wealthy elites and productive wealthy elites. In poorer countries, wealth inequality is often in the form of inequality in land ownership. I could be convinced otherwise, but I find the literature suggesting that quasi-feudal land ownership stymies growth, and land reform can help to spark it, convincing.
In wealthier countries, by contrast, we might expect two different kinds of wealthy elite. On the one hand, there are the heirs, scions, landholders, oligarchs, powerful gentry, wealthy professionals, and other people who make their money through the accumulation of economic rents. This class basically has the same parasitic effects on growth as in developing or poor nations. On the other hand, there is the properly capitalist class: people taking risks by investing their wealth in productive ventures in an attempt to grow even richer.
The latter class of wealthy elites is not particularly threatened by stronger welfare programs. They might face higher taxes, but they are generally confident in their abilities to stay on top in a dynamic environment. It’s the former group of elites who have strong incentives to oppose redistribution: their wealth is largely a product of freeloading predistribution. In countries where this group dominates, growth is slower. In countries where the latter group dominates, growth is higher.
You address most of this in your footnotes, but my further point that higher taxation and redistribution threatens productive elites less than unproductive ones seems like an interesting question to explore.
This story seems consistent with the data observed here, but allows for elements of both right- and left-wing narratives about inequality to remain true.
I’d be interested in an attempt to try to prove or disprove this by looking at the degree to which the top 10%, 1%, and 0.1% are invested in property (or some other means of identifying unproductive rent-seeking-associated assets).
Really interesting piece. The link between inequality and outcomes is particularly well made.
I do wonder though whether the “left vs right” framing slightly limits the discussion. It can turn what are essentially structural dynamics into something more tribal than analytical.
GDP plays into that too. It tells us how big the economy is but not who it is actually working for. You can have strong growth alongside increasingly uneven outcomes.
The Gini coefficient is helpful in that it captures income distribution but I am not sure it tells the full story on its own. If anything when you shift the lens to wealth, where assets compound over time and shape outcomes across generations, the picture often looks even more skewed.
Feels like there is another layer to the argument there that could be worth exploring.
First of all … anyone who is willing to accept inequality for the sake of growth, even if that were accurate, is 100 percent someone who is financially privileged. You won’t find any person of normal intelligence who is financially disadvantaged saying it’s fine because it’s helping the economy.
Second of all, as a working class woman married to a Dutch citizen who has spent significant time in Europe — not just touring cathedrals but having dinners in people’s home etc. — its impossible not to realize how superior the European lifestyle is to the American one. I will concede it might be advantageous to the very wealthiest people to live in the U.S., but that’s perhaps largely because we heap all our resources on the rich and provide a large class of workers ripe for economic exploitation.
Plenty of poor people are willing to accept inequality for the sake of growth, because standards of living are largely absolute, not relative.
Most people care more about their next $10,000 than whether Jeff Bezos has $100 billion or $1 trillion. It’s generally those who are already fairly wealthy who care more about their status relative to the ultra-wealthy than they do about a little extra income. Most people do not have the luxury of caring about status more than income.
As a working class American who married a poor Italian woman, I have to disagree with respect to the “European lifestyle.”
Inequality doesn’t imply poverty. Even poor Americans are richer than many Europeans, in an absolute sense.
It’s a matter of personal choice whether you prioritize economic wealth in an absolute sense or socioeconomic status, which is a positional good.
If you asked people if they would pay money just to make the rich less rich, most people would say no.
That’s not obviously the tradeoff, as Dr. Rutar’s article here shows. But anyone worried it might be can be perfectly rational not to care about inequality.
Very few people would rather the poor were poorer if only the rich were less rich. If you are one of those people, consider yourself privileged.
I don’t think anyone is making the argument that anyone wishes to pay money to make the rich less rich. That’s not a thing.
I cannot pay my power bill with socioeconomic status. I have no status and don’t need it. Just cash, please.
I think you’re not grasping that there’s been a giant suckage from the working and middle classes by the ultra rich that really took off around 1980. The rich did not just … suddenly start working harder. They managed to change all the rules (particularly taxes) to benefit themselves, and they widened the gap between workers and executives.
> I think you’re not grasping that there’s been a giant suckage from the working and middle classes by the ultra rich that really took off around 1980.
No. I fully grasp that this is the empirical argument you are making.
I simply disagree that there is good evidence to support it. Even if I bought your argument about structural changes in the 1980s (the difference in effective tax rates is actually quite small), you don’t even really make the argument that these changes have been bad for the working class, just that they’ve benefitted the wealthy. Economics is not a zero-sum game.
The same goes for your strawman argument that the only explanation for increased inequality otherwise is that the rich “suddenly started working harder.” A much simpler explanation would simply be that returns on invested capital between 1980-present were higher than between 1950-1980. This could generally align with the computer and electronics revolution, or with the increased foreign competition the US (the only country which actually saw a somewhat significant increase in 1% and 0.1% income ratio —largely in the 1990s) as Europe and Japan recovered from WWII, and American exports grew less competitive.
There’s another mechanism you don’t mention, other than incentives. Rich people have more left over to invest, so inequality leads to more capital formation. The flip side is that equality leads to more consumption, so that (ignoring the capital that crosses borders) there might be a good balance between the two that maximizes growth.
On incentives, my gut take is that people care about resources but they care about status more, so that in more equal regimes most of the incentives for betterment remain.
As I said, there is nothing to discuss. The investment multiplier for tax reduction for enterprises is only 0.4, while the investment multiplier for tax reduction for the middle class is 0.7.
My intuition here is that there exists an equality-growth possibility frontier sonewhere out there in the vast policy space, but that no real-world country is anywhere near it.
This week on Tibor Time: Tibor tries to make friends with liberals and conservatives and finds it’s not so easy!
I was scared of the neoliberal piece and it was really good. I will check this out.
I think a big problem with this post is that you don’t distinguish between the different causes of inequality. For example, as appears to be the case, in, for example, Russia if inequalities because resources are concentrated among a few people who are close to the government or have the right political connections and are able to use these contacts to remain wealthy and perhaps even keep their children wealthy then obviously, this is not going to incentivise productive behaviour since productive behaviour has very little to do with becoming wealthy. On the other hand, if you have a good market economy, where people are wealthy only because of inheritance or because they themselves have done economically productive things. Then this creates the right incentives.
Also, I don’t think you grapple with just how revolutionary the possibility that increasing taxes on the rich has no effect on economic growth would be. If redistribution is not a leaky bucket, then you could just increase welfare by indefinitely increasing taxes on the rich and spending it on government priorities, or just giving it to the poor, which is obviously impossible and clearly a mistake.
Clearly taxes have to have some effect on the level of effort. People are willing to put in otherwise 100% income tax would work, which is obviously not possible. Empirical analysis is good and all, but you can’t just totally ignore theory. I’m not even getting into effects from the activities of the rich, like the fact that most people working in research and development are high income earners, and reducing effort by them leads to negative externalities in the form of ideas not being discovered. A few studies that have ambiguous results with many studies, giving conflicting results is just not sufficient basis for throwing out such a basic principal as that taxing something gets you less of that thing.
Also, part of the issue is that these ambiguous results can be easily explained if it simply that the effect of increasing the taxes on the rich is simply small enough not to be easily noticed, and it’s even defensible, although unlikely to think that perhaps on current margins, decreasing inequality has no effect what seems absolutely crazy is the idea that inequality has nothing to do with economic growth as that would imply that if the government enforced total equality between everyone, so that no one was economically better off than anyone else, then this would have no effect on growth, which seems at least on theoretical grounds to be absolutely ridiculous and very, very unlikely.
I do what I can with the existing research. There’s just not a hidden trove of studies and meta-analyses that look specifically and explicitly at what you mention when gesturing at different “types” of inequality. But sure, I think it’s wholly unobjectionable to say that inequality due to rent-seeking, politics, and resource wealth is different from inequality that stems from the free market process.
Still, the papers that are focused solely on the developed world, and which control for corruption etc., should implicitly capture what you speak of. And I guess they partly do when it comes to non-linear effects, with the threshold being much lower in developed countries than developing ones.
Re: taxation, where do you see me saying extreme taxation should have no effect? I’m just looking at what actually happens in the real world, which is moving taxes up or down a bit (the shifts were slightly larger in that OECD paper, which looks specifically at major tax cuts). Obviously, going from zero taxation to 100%, or vice versa, would have ginormous effects. Who’s saying otherwise? I’m looking at a wholly different (and much more policy relevant) question.
Okay, looks like I got carried away because of the title of your post. As I understood you to be arguing that inequality has no effect on economic growth rather than arguing that on current margins, inequalities unlikely to have any effect on economic growth. I agree with the second one, or at least think it’s quite plausible. Although now I am wondering how your results can be reconciled with, for example, Jones 2025, who argues that actually because of the effect on discovering new ideas, income tax on the rich should potentially be actually negative and the lodes of studies by conservative economists arguing for a revenue maximising tax rate in the range of 40 to 70% as that would seem to predict that we should notice the effect on current margins, although to be fair, there are also lots of studies by liberal economists suggesting that the revenue maximising rate might even be above 80%. In which case it’s not surprising that we don’t notice it on current margins or at least not super surprising. I also do think that the inability of current studies to do much to distinguish between income inequality due to natural resources and rent extraction and income inequality. Due to the free market makes their conclusion that inequality has no effect super questionable. BTW, I edited the comment. I wrote at the beginning of this thread before realising that you had already replied, so my original comment might have given you a misleading picture of my views as I realise that I did not make it clear that I do find it believable that the effect on growth is just too small to be noticed on current margins. I also probably was a bit too fiery in my original comment on account of having a bad day. Sorry if I ended up being rude on account of that. Also, I was a bit too incredulous because I thought you were implicitly arguing that existing inequalities are not necessary for growth instead of just arguing that we can decrease inequality a little without noticeable effects on growth.
I’m going to give a bit of a “just-so” story here, but:
> The negative effect of inequality on growth appears stronger in developing countries. In richer economies, the relationship is weaker or sometimes positive.
> inequality measured after taxes and transfers is associated with more negative growth effects than inequality measured before fiscal redistribution.
Both of these might be neatly explained by the difference between rent-seeking wealthy elites and productive wealthy elites. In poorer countries, wealth inequality is often in the form of inequality in land ownership. I could be convinced otherwise, but I find the literature suggesting that quasi-feudal land ownership stymies growth, and land reform can help to spark it, convincing.
In wealthier countries, by contrast, we might expect two different kinds of wealthy elite. On the one hand, there are the heirs, scions, landholders, oligarchs, powerful gentry, wealthy professionals, and other people who make their money through the accumulation of economic rents. This class basically has the same parasitic effects on growth as in developing or poor nations. On the other hand, there is the properly capitalist class: people taking risks by investing their wealth in productive ventures in an attempt to grow even richer.
The latter class of wealthy elites is not particularly threatened by stronger welfare programs. They might face higher taxes, but they are generally confident in their abilities to stay on top in a dynamic environment. It’s the former group of elites who have strong incentives to oppose redistribution: their wealth is largely a product of freeloading predistribution. In countries where this group dominates, growth is slower. In countries where the latter group dominates, growth is higher.
You address most of this in your footnotes, but my further point that higher taxation and redistribution threatens productive elites less than unproductive ones seems like an interesting question to explore.
This story seems consistent with the data observed here, but allows for elements of both right- and left-wing narratives about inequality to remain true.
I’d be interested in an attempt to try to prove or disprove this by looking at the degree to which the top 10%, 1%, and 0.1% are invested in property (or some other means of identifying unproductive rent-seeking-associated assets).
Really interesting piece. The link between inequality and outcomes is particularly well made.
I do wonder though whether the “left vs right” framing slightly limits the discussion. It can turn what are essentially structural dynamics into something more tribal than analytical.
GDP plays into that too. It tells us how big the economy is but not who it is actually working for. You can have strong growth alongside increasingly uneven outcomes.
The Gini coefficient is helpful in that it captures income distribution but I am not sure it tells the full story on its own. If anything when you shift the lens to wealth, where assets compound over time and shape outcomes across generations, the picture often looks even more skewed.
Feels like there is another layer to the argument there that could be worth exploring.
First of all … anyone who is willing to accept inequality for the sake of growth, even if that were accurate, is 100 percent someone who is financially privileged. You won’t find any person of normal intelligence who is financially disadvantaged saying it’s fine because it’s helping the economy.
Second of all, as a working class woman married to a Dutch citizen who has spent significant time in Europe — not just touring cathedrals but having dinners in people’s home etc. — its impossible not to realize how superior the European lifestyle is to the American one. I will concede it might be advantageous to the very wealthiest people to live in the U.S., but that’s perhaps largely because we heap all our resources on the rich and provide a large class of workers ripe for economic exploitation.
Plenty of poor people are willing to accept inequality for the sake of growth, because standards of living are largely absolute, not relative.
Most people care more about their next $10,000 than whether Jeff Bezos has $100 billion or $1 trillion. It’s generally those who are already fairly wealthy who care more about their status relative to the ultra-wealthy than they do about a little extra income. Most people do not have the luxury of caring about status more than income.
As a working class American who married a poor Italian woman, I have to disagree with respect to the “European lifestyle.”
Well, now I’ve met ONE poor person ok with inequality so the rich can keep getting richer.
I’m not ok with it.
Inequality doesn’t imply poverty. Even poor Americans are richer than many Europeans, in an absolute sense.
It’s a matter of personal choice whether you prioritize economic wealth in an absolute sense or socioeconomic status, which is a positional good.
If you asked people if they would pay money just to make the rich less rich, most people would say no.
That’s not obviously the tradeoff, as Dr. Rutar’s article here shows. But anyone worried it might be can be perfectly rational not to care about inequality.
Very few people would rather the poor were poorer if only the rich were less rich. If you are one of those people, consider yourself privileged.
I don’t think anyone is making the argument that anyone wishes to pay money to make the rich less rich. That’s not a thing.
I cannot pay my power bill with socioeconomic status. I have no status and don’t need it. Just cash, please.
I think you’re not grasping that there’s been a giant suckage from the working and middle classes by the ultra rich that really took off around 1980. The rich did not just … suddenly start working harder. They managed to change all the rules (particularly taxes) to benefit themselves, and they widened the gap between workers and executives.
> I think you’re not grasping that there’s been a giant suckage from the working and middle classes by the ultra rich that really took off around 1980.
No. I fully grasp that this is the empirical argument you are making.
I simply disagree that there is good evidence to support it. Even if I bought your argument about structural changes in the 1980s (the difference in effective tax rates is actually quite small), you don’t even really make the argument that these changes have been bad for the working class, just that they’ve benefitted the wealthy. Economics is not a zero-sum game.
The same goes for your strawman argument that the only explanation for increased inequality otherwise is that the rich “suddenly started working harder.” A much simpler explanation would simply be that returns on invested capital between 1980-present were higher than between 1950-1980. This could generally align with the computer and electronics revolution, or with the increased foreign competition the US (the only country which actually saw a somewhat significant increase in 1% and 0.1% income ratio —largely in the 1990s) as Europe and Japan recovered from WWII, and American exports grew less competitive.
There’s another mechanism you don’t mention, other than incentives. Rich people have more left over to invest, so inequality leads to more capital formation. The flip side is that equality leads to more consumption, so that (ignoring the capital that crosses borders) there might be a good balance between the two that maximizes growth.
On incentives, my gut take is that people care about resources but they care about status more, so that in more equal regimes most of the incentives for betterment remain.
As I said, there is nothing to discuss. The investment multiplier for tax reduction for enterprises is only 0.4, while the investment multiplier for tax reduction for the middle class is 0.7.
Right, that settles it! :D
(Arnold, 2010) Economic Growth versus Transfers (in Microeconomics 10e)
(Baselgia, 2022) Inequality and Growth: A Review on a Great Open Debate
(Churchill, 2017) Are Government Transfers Harmful to Economic Growth? A Meta-Analysis
https://www.econstor.eu/bitstream/10419/259361/1/wp2022-05.pdf
https://www.sciencedirect.com/science/article/pii/S0264999317305047