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IMF to the rescue of the Spirit Level believers?

  • September 25th, 2011

An IMF Finance and Development report this month will raise the spirits of the Spirit Level believers. Berg and Ostry outline research that suggests:

"…equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality. Countries may find that improving equality may also improve efficiency, understood as more sustainable long-run growth"

The report leaves the research finding open to the same objection that undermines the Spirit Level case –  that measures of income inequality may be picking up the factor that makes the difference, but it is not income inequality. The thesis of the IMF research paper is that income inequality is associated with lack of sustained growth in ways that suggest it is causal.

But the report does not effectively exclude the possibility that  Income inequality is, along with many other undesirable correlates of poverty and of less successful societies,  not a cause but a symptom. Income inequality measured by the Gini coefficient may be capturing the outcome of a constellation of underlying factors that lead to slower growth, less social cohesion, more crime, lower health performance, and greater income inequality. 

Sir Paul Callaghan in his recent Victoria University Chancellor's lecture was brutally blunt about what he saw as the cause of New Zealand's Gini coefficient embarrassment (increasing income inequality) – education of our distribution tail that left them useless. So could research on spirit level claims pick up such explanations?

The report says:

"We compare the risk that the spell will end in a given year with the values of these variables in previous years—at the beginning of the spell or the previous year—to minimize the risk of reverse causality. In the face of the usual difficulties involved in disentangling cause and effect, and the risk that we have been unable to find good measures of important variables, the results we report below should nonetheless be interpreted only as empirical regularities (“stylized facts”).

But it is not clear to me that such steps will detect reverse causality,  if income inequality is largely a reflection of deep inequalities in the value of the people in a society to each other.

A society with  a large proportion of people "who never would be missed" being carried economically and in other ways by more skilled or trustworthy neighbours is likely to be under stress. In a world of global trade, if the low value people in an economy can offer less (in skills, reliability, etc)  to their neighbours than people in trading partners where earnings are generally lower, the low rated people in the first society have nowhere to go but down in status, relative incomes and sense of worth. Political action can attempt to reverse or disguise the trend, but over time it is inexorable unless the low value people can be upskilled and acquire 'values' that restore their relative worth to others. A society that cannot expect its 'tail' of low acheivers to be economically valuable must suffer the handicaps of serious tension.

Trickle down theory may be just vain faith if it is suposed to work in a society in which there is a critical mass of people who cannot or will not be able to take advantage of the improvements in communication, technology, market demand for employment etc that normally come with increased wealth at higher levels. If there are simply too many not likely to keep pace in personal development with the least common denominator class of a trade partner country, they will not be employed or valued.  

The real world values scarcity, not the human value of each individual. Those in any society with internationally valued skills may maintain the potential for international relativity in incomes. But if their local political system obliges them to carry their local tail, they do not enjoy the surplus of their skill level. They might rationally accept that if it is seen as temporary. If the surplus is clearly being used to improve the human capital of the tail that might be enough to mitigate the flight of the internationally valuable people. But if instead the surplus is simply taken to sustain the tail , or even to reinforce the unsuccessful values that have delivered its members their position of negative value, the society must be unstable. Emigration pressure will be a serious handicap.

The world is cruelly indifferent to our preference that it  deliver respect and  the rewards of labour and power equally to all. Markets reward scarcity. Non-market systems of distribution tend to reward power. Either way those who do not have much to offer that their neighbours want or need will eventually get less. Their fellow citizens with choice exercise it to change the politics, or they go where they can retain more of the surplus they can create. Both are debilitating.

Simple really. So why does the left defend our welfare and education status quo that is delivering us such a proportion of people who cannot offer enough to their communities for anyone to want to pay them for what they do? How can any person of honour defend institutions that have  delivered the opposite of what was so fervently hoped by its well meaning designers?

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