Death of trickle-down economics?

Posted: 17 June 2015 in Uncategorized
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While the policy side of the IMF continues (with the other members of the troika) to push for austerity measures in Greece, its research side (against the grain of much of contemporary mainstream economics) is sounding the death knell of trickle-down economics.

I am referring to the recent report, Causes and Consequences of Income Inequality: A Global Perspective, prepared by Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, and Evridiki Tsounta [pdf]. Their main finding (based on an analysis of data for 159 advanced and emerging markets and developing economies) is that there’s an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth.

Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.

To my mind, cross-country studies of this sort should always be taken with at least a few grains of salt (precisely because the causes and consequences of inequality vary across countries, and correlation is not causation). And the specific coefficients (such as the idea that “if the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years”) even more so (because, as I’ve argued before, the underlying data, such as Gini coefficients, mean very different things depending on the countries studied).

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Still, this IMF study does give lie to the idea that the grotesque levels of inequality we’ve been witnessing in recent decades—the dramatic rise in both top-1-percent incomes shares and corporate profits—are a necessary condition for economic growth.

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Most important, the IMF study challenges the idea that everyone eventually shares in whatever economic growth has taken place (which is dramatically illustrated by the growing gap between productivity and wages).

In my view, these should be considered the last nails in the coffin of trickle-down economics.

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