Proof that Inequality Harms Economic Growth?
If you follow the inequality debate, then you’ve no doubt heard that the OECD has just released a report claiming to show that economic inequality lowers economic growth. I’ll have more to say about the study itself soon (in the meantime, you can find some valuable comments here, here, and here). But the most striking thing is the response to the report: namely, that its conclusions have been trumpeted uncritically by the media and by everyone who already believes inequality is a problem.
What’s wrong with that? You can read the entire 64 page paper here. One thing you’ll notice is that its conclusions are based on an econometric analysis, and as with all these sorts of analyses, it depends on models that involve a vast number of assumptions and judgment calls. That’s not an indictment of such studies per se, but it does mean that we can’t cut and paste one study’s conclusions and announce that “we know inequality hurts growth.”
After all, this isn’t the first study to look at the relationship between inequality and growth. On The Debt Dialogues, I recently interviewed Manhattan Institute’s Scott Winship, a respected inequality researcher, who just issued a report finding exactly the opposite: that, in advanced economies, higher inequality is generally associated with higher growth.
Did Winship’s study make headlines? Nope? Did those who did take the time to comment on his study question his choices and assumptions rather than accept them uncritically? Yep. And, as Winship discussed on my show, he ended up agreeing with some of those criticisms.
This suggests a double standard. Studies that challenge conventional wisdom seldom make headlines and are treated with a skeptical eye. Studies that claim to prove what people already believe? Hey, you can’t argue with science.
The truth is, we should view all of these sorts of studies with a critical eye — even those that support our own views.