Archive for October, 2012

October 8, 2012

Growth and Inequality: Analyzing an Important Relationship

Written By: Dennis Shen

In academic circles, it has become commonly accepted that rapid economic growth can increase inequality. This has been supported by international developments in recent decades that show declining inequality between countries but increasing inequality within countries. China and the United States are just two examples. To explain the reason, some point to globalization as the natural conduit not only for high growth and inter-country convergence but also the agent for downward domestic pressures on working class payrolls, capping wage increases in response to international labor competition and resulting in intra-country divergence.  Others have argued that unregulated laissez-faire economics is both an apparatus for rapid economic advances and the natural environment for the development of a Darwinian economy (see Robert Frank’s “The Darwin Economy”) of winners and losers across an increasingly segmented income distribution, requiring a strong state to intervene and re-balance.

In a recent article on Project Syndicate (link here), Columbia professor Alexander Stille acknowledged this accepted relationship between rapid economic growth and increasing inequality, but also interestingly pointed to a novel alternative hypothesis: in addition to rapid growth driving rising inequality, could times of relatively weak growth also be associated with the very same inequality phenomena? As Stille writes, “might slow growth and rising inequality – the two most salient characteristics of developed economies nowadays – also be connected?” At first, it would seem counter-intuitive that very weak growth be commonly associated.

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