Just Right Inequality


Thomas B. Edsall in the NYT:

[Simon] Kuznets’s research into the relationship between inequality and growth laid the foundation for modern thinking about what has become a critical question: Has inequality in this country reached a tipping point at which it no longer provides an incentive to strive and to innovate, but has instead created a permanently disadvantaged class, as well as an ongoing threat of social instability?

One of the most articulate contemporary proponents of the “optimal inequality” thesis is Richard Freeman, a labor economist at Harvard. In a 2011 paper, Freeman wrote: “Is there a level of inequality that optimizes economic growth, stability, and shared prosperity? My answer is yes. The relation between inequality and economic outcomes follows an inverted-U shape, so that increases in inequality improve economic performance up to the optimum and then reduce it.”

Freeman argues that the costs of excessive inequality are high: “Inequality that results from monopoly power, rent-seeking or activities with negative externalities that enrich their owners while lowering societal income (think pollution or crime), adversely affect economic performance. High inequality reinforces corruption by allowing a few ‘crony capitalists’ to lobby politicians or regulators to protect their economic advantages. When national income goes mostly to those at the top, there is little left to motivate people lower down. The 2007 collapse of Wall Street and bailout of banks-too-big-to-fail showed that inequality in income and power can threaten economic stability and give the few a stranglehold on the economy.”

Conservative economists look at the issue of equality from the opposite vantage point: when do government efforts to remedy inequality and to redistribute income worsen conditions by serving as a deterrent to work and productive activity?

More here.