How Inequality Damages Economies
ANDREW G. BERG and JONATHAN D. OSTRY are, respectively, Assistant Director and Deputy Director in the Research Department of the International Monetary Fund. The views expressed here are those of the authors and should not be attributed to the IMF.See more by Andrew G. BergSee more by Jonathan D. Ostry
Looking back at Irving Kristol's 1980 essay "Some Personal Reflections on Economic Well-Being and Income Distribution," as Foreign Affairs recently did, provides a useful intellectual lens from the past to focus the economic conversation today. Kristol argued that economic inequality was "but one manifestation of how nineteenth-century ideologies -- and most especially the socialist ideologies -- have so decisively shaped modern social science." Moreover, he wrote, income distribution does not really change over time so it is, as a subject for study, inconsequential.
Fortunately, economists failed to take his advice; recent studies of inequality reveal the limitation of Kristol's historical perspective. Kristol narrowly focused on one long spell of stable and relatively even distribution. But a careful look at the varying levels of inequality in different countries demonstrates just how much societal divides in wealth really matter. Countries with high inequality are far more likely to fall into financial crisis and far less likely to sustain economic growth.
It is a coincidence that just as Kristol was writing, the United States was set to undergo a dramatic economic transformation. In the 30 years that followed (see chart above), income inequality grew significantly, rising gradually in the early 1980s, and then later more sharply. So, at least in some sense, Kristol's argument can be forgiven as a victim of circumstance.
Still, economic inequality was a significant phenomenon long before 1980. Kristol chides the National Bureau of Economic Research for its excessive concern with income distribution in the 1920s. But as an influential study by the economists Thomas Piketty and Emmanuel Saez shows, income inequality in the United States reached unprecedented heights in the 1920s.