Twitter Roundup: Joseph Stiglitz is Right About Inequality

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As a financial journalist, Twitter is indispensable. It's a personal wire service that I customize to suit my appetite for information; an instant way of getting breaking news. Plus I follow some pretty clever people who can cram a lot of insight into 140 characters.

So once a week I curate my favorite tweets and add a little context to help explain an emerging story. This week, new research from the International Monetary Fund (IMF) returned economic inequality to the forefront of national policy discussions. It may sound dull, but if a healthy economy matters to you, stay with me. The implications of this research are enormous. 

The paper, written by economist Jonathan Ostry, begins by retesting some of the oldest, sorest sticking points in the study of inequality. The results confirm what Nobel laureate Joseph Stiglitiz has been saying about the impact of inequality on economic growth.

But even addressing inequality is a challenge; not least because the policy mechanisms involved (taxes, subsidies, targeted spending programs) are political landmines. It was a surprisingly ambitious move.

Criticisms of the paper ranged from the weak, yet still lucid...

Gini is a broad measure of inequality. The IMF's calculation shows the difference between pre-tax disparities in income and what's left after taxes have been collected and transfers have been made. the paranoid and nonsensical. 

There's no conspiracy. Everyone just take a deep breath.

Remember the guy who came up with the "invisible hand"? The grandfather of capitalism? Yeah, even he thought redistribution was ok.

Making sense of it all

Certainly, some level of inequality is necessary for capitalism to function, but it's clear that too much of it leads to slower growth. Specifically, countries with large gaps between the rich and the poor expand only in short bursts, whereas egalitarian societies produce longer, sustained growth. A mere 10-percentile increase in income equality would, on average, lead to a ~45% longer growth spell. 

The report classifies growth spells as a " period of at least five years that begins with an unusual increase in the growth rate and ends with an unusual drop in growth." So what they're talking about is not abstract; it's very tangible. At the very least, a 10-point change in inequality could buy two more years of prosperity for the whole country.

Looking forward, there are only two high-profile policy proposals that try to reverse the widening disparity. One is a greater tax burden on the wealthiest Americans, and the other is to raise the minimum wage. Both ideas have faced a chilly reception from American companies looking to keep expenses low and from wealthy citizens with a persecution complex. But the jury is back from deliberations and the verdict says it's not class warfare.

It's just good economics.

In his book, The Price of Inequality, Professor Stiglitz argues that redistribution can be effective because low-income Americans are more likely to spend the extra dollars on improving the basic quality of their lives. A proposed increase in the minimum wage from $7.25 to $10.10 would by itself bring 1 million people out of poverty.

That's 1 million consumers with greater purchasing power. 

Proof that it can be done

A full minimum wage bill will appear before the Senate sometime in late March or early April. To demonstrate the extent of his commitment, President Obama took action by unilaterally raising the minimum wage for all federal contractors, all of whom technically work for him. On the market side, apparel-maker the Gap (NYSE: GPS  ) made the bold choice of implementing an internal $9 per hour wage floor. Not only is it a savvy PR move, but recent studies suggest that it could be financially beneficial as well. According to the Center for Economic and Policy Research, raising the minimum wage reduces employee turnover and makes workers more productive, offsetting any additional wage expense.

The Foolish bottom line

By releasing this paper on the eve of a minimum wage fight, the IMF is clearly trying to maximize its impact on the conversation. And that's a good thing! Yes, there's no silver bullet for solving poverty, as there's also no silver bullet for inducing growth in an economy. But all too often, policymakers have used that as a shield for inaction. We now have strong evidence that the "trade-off" between inequality and growth is just a myth, so the list of excuses is starting to grow thin. The time for action is now.

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Gaurav Seetharam

Gaurav has been writing for The Motley Fool since December 2012. His core interests include banking, financial regulation, and macroeconomics. Oh, and Game of Thrones.

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