But what to do about it?

In a previous post I tried to point out that there are areas in any modern economy where markets don’t operate reliably, or don’t operate at all. Market meaning something that works through supply and demand to optimize society’s allocation of resources.

Sometimes this is because what constitutes supply (let’s say savings) and what constitutes demand (say business investment) don’t actually meet directly in a marketplace,  but go through an intermediary (institutions like banks, etc.) with its own motivations. Sometimes it’s because one side (say skilled labor) can not change rapidly in response to the other (say factories relocating overseas).

Why should we care? Because in a market for coffee sweeteners, for example, all sides can adjust fluidly to the best balance of prices that makes consumers happy and is profitable for business. Which is presumably a good thing for society. Where markets can not accomplish this, the consequences may be very much to the detriment of society. (See the Great Depression.) Waiting for a generation of people to die off is not an acceptable way to optimize the use of resources.

I still don’t like the term income inequality, for reasons I’ve already explained, but fortunately there are people seriously studying the effects of income imbalance. I just discovered this short paper, published earlier this year. From the paper:

[T]here is a strong negative relation between the level of net inequality and growth in income per capita…and there is a weak (if anything, positive) relationship between redistribution and subsequent growth

[T]he things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth

It’s a growing consensus. Beyond a certain point, income imbalance hurts the economy. And many economies are beyond that point. The question is, what can we do?

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