Inequality and Economic Growth

This essay examines the relationship between inequality and economic growth and whether they are compatible or not. First, definitions of economic inequality and how it is measured will be presented, then the US’ examples will be taking into consideration when it eventually will be discussed how to boost economic growth and minimizing inequality at the same time
There are many different views on inequality and how serious it should be taken. Inequality has been on the agenda of societal debates for years, but in terms of frequency of questions to this topic, inequality must be looked upon as a ship to be embarked and have an opinion on. There are many different ways in which inequality can be measured, why the perception of the word has developed through time and can be racially attached but also sexism, homosexual rights, and even happiness define some of the things we can associate with inequality. There are different ways to measure inequality but the perhaps best known method is the Gini-coefficient – a tool to measure economic inequality, that is. The Gini-coefficient goes from 0 to 1, and the Gini-coefficient being 0 would mean that everyone in a group has the same income, whereas the coefficient being 1 would mean that all the income within a group goes to one single person. It aggregates the gap in income between people in a group and it is often used to compare countries’ levels of inequality.
By taking a closer look at some of the statistics, we can see that the emerging economies, such as Brazil, Russia, and China, are more unequal than the developed economies – being the Scandinavian countries, Japan, and other OECD countries. Scandinavian countries have the smallest economic inequality with a Gini-coefficient of around 0.25, whereas the United States is up by almost 30 % since 1980 and is now at 0.39. China, as perhaps the biggest of the emerging economies, has risen by around 50 % to 0.42. By taking these random checks, one would think that the World has become more unequal as a whole, but instead, the gap between the poorest countries and the richest is narrowing in, meaning the World is becoming a fairer place. However, this does not warrant social cohesion in the different layers of society.
Figure 13.1 shows that countries having health and social problems are more unequal as well. Once again, the Scandinavian countries and Japan are doing very well in both matters – social and health problems and income inequality – whereas the US is doing disturbingly bad, and is actually the worst case in this specific figure. Despite the inequality, has the US been able to provide economic growth? Or are equality and economic growth each other’s requisites?
Inequality and prosperity have a relationship that can be defined as ambiguous. On one hand, inequality in society can create incentive to work harder, spend more money through investments, and save the money you have earned. However, inequality can also, in the perhaps most common perception of the meaning of the word, discourage and shield off potential work force by not giving the same opportunities for education etc.

In the US, the richest 1% of Americans has doubled the share of national income since 1980 from 10 % to 20 %. This can be worrying because it creates cronyism between the rich, who do not spread their wealth. This is of course a consequence of the economic deficit that the US currently faces, why people are afraid to advance expenses and investments. A research by economists at the IMF (International Monetary Fund) suggests that inequality is the most “pressing problem” of the coming decade, and that it slows growth, causes financial crisis and weakens demand. But why not just tax the rich and spend the money on the young and poor so they can start creating wealth instead to make the blood start flowing? As mentioned before, even more taxation of the rich will perhaps erode the incentive to work, and a more efficient way to increase growth is to activate the ones in need – through rebalancing the government spending for instance. Creating incentive to work more can be done through moving the government spending from transfers to education and thereby targeting the younger and poorer instead of the older and richer people. However, this is not cost-free, and due to the economic crisis and the bleeding numbers of the domestic budgets, it can be necessary to raise tax revenue, by taxing the richer, and there is also a demographic challenge that forces the government to spend more on elderly people because they will constitute the vast majority of the population in the future. This is one suggestion as to what can be done to boost growth and minimize inequality at the same time. With that being said, there are arguments that suggest the inequality to be less worrying than it might seem at first.
According to an article published by Bloomberg: “Poverty, inequality aren’t as bad as you think”, poverty is not so much of a problem in the US. The US Census Bureau has made a survey showing that 15 % of Americans live in poverty, but according to economists, Bruce D. Meyer and James X. Sullivan, it is only about 4-5 % of the US’ population who can define themselves as poor. This has to do with the fact that people tend to conceal how much they actually earn, and the quite opposite is in evidence in matter of consumption. The main argument of the article is that poverty is overstated, thus so is the income inequality.
In its worst sense, inequality does undermine the economic potential, and that has very likely something to do with the lack of social cohesion. The whole debate on (in)equality lacks nuances to the topic. As previously mentioned, maybe people in the US are not as bad off as they think themselves. Given that we just passed the eye of the hurricane on the economic crisis, the demands for equality throughout layers in society can reasonably be considered as utopic. Equality is expensive and when the money is sufficient enough, maybe then would be an even better time to see how it can be used a tool to boost economic growth.

References
For richer, for poorer | The Economist. (2012, October 13). The Economist - World News, Politics, Economics, Business & Finance. Retrieved December 5, 2012, from http://www.economist.com/node/21564414

Policy prescriptions: A True Progressivism | The Economist. (2012, October 13). The Economist - World News, Politics, Economics, Business & Finance. Retrieved December 5, 2012, from http://www.economist.com/node/21564410

Poverty, Inequality Aren’t as Bad as You Think - Bloomberg. (2012, September 21).Bloomberg - Business, Financial & Economic News, Stock Quotes. Retrieved December 6, 2012, from http://www.bloomberg.com/news/2012-09-20/poverty-inequality-aren-t-as-bad-as-you-think-view.html

Wilkinson, R. G., & Pickett, K. (2010). The spirit level: Why equality is better for everyone – chapter 13. London: Penguin Books.

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[ 1 ]. "For richer, for poorer | The Economist", 2012
[ 2 ]. "For richer, for poorer | The Economist", 2012
[ 3 ]. Wilkinson & Pickett, 2010, p. 174
[ 4 ]. "For richer, for poorer | The Economist", 2012
[ 5 ]. "For richer, for poorer | The Economist", 2012
[ 6 ]. "For richer, for poorer | The Economist", 2012
[ 7 ]. ”Policy prescriptions: A True Progressivism | The Economist, 2012
[ 8 ]. “Poverty, Inequality aren’t as bad as you think – Bloomberg”, 2012

References: [ 2 ]. "For richer, for poorer | The Economist", 2012 [ 3 ] [ 4 ]. "For richer, for poorer | The Economist", 2012 [ 5 ] [ 6 ]. "For richer, for poorer | The Economist", 2012 [ 7 ] [ 8 ]. “Poverty, Inequality aren’t as bad as you think – Bloomberg”, 2012