Head of Research at the Adam Smith Institute, Ben Southwood, argued against the recent OECD report that found income inequality curbs growth in the CityAM Forum:
Ben Southwood, head of research at the Adam Smith Institute, says No.
International cross-sectional studies like the OECD’s – which compare different countries at one point in time – are prone to errors. This is true even if you look at a group of similar (rich) countries like the OECD, which includes Sweden on the one hand and Mexico on the other.
Countries that punish crime harshly may have more crime, but that doesn’t mean punishing crime harshly increases crime.
Countries with more doctors may have more disease, but we’d expect that doctors are a response to disease, not a cause.
Similarly, countries with less inequality may have more growth, but cutting inequality may not boost growth.
For such questions, it’s better to use time-series data. And if you look at countries or regions where inequality jumps, growth typically jumps as well.
A highly-cited paper by Kristin Forbes, for example, found “an increase in a country’s level of income inequality has a significant positive relationship with subsequent economic growth.”
Read the full debate here.