Costs of inequality
Since the global financial crisis of 2008, however, economists and policymakers have begun to question whether supply-side policies alone can ensure sustained growth. They point to mounting evidence that growth tends to be more fragile and less resilient when it is not inclusive and its fruits accrue mainly to the wealthiest.
This could reflect the fact that—when adverse shocks occur—there is less support in unequal societies for the kinds of policies that help right the economic ship, because the short-term pain doesn’t bring broadly shared longer-term gains. It could also simply reflect the fact that these societies don’t offer equal access to education, health care, nutritious food, credit markets, and even the political process (equality of opportunity for short), making them less resilient in general.
Economists, including Raghuram Rajan and Joseph Stiglitz, have pointed to growing inequality in many countries as a prime cause of the 2008 crisis. My own work also found that the likelihood of succumbing to a severe downturn was greater in countries with high or rising inequality in the years and decades before the crisis (Berg and Ostry 2017). We argue (Ostry, Loungani, and Furceri 2018) that policymakers’ faith in their ability to get growth going through supply-side measures and deal with distributional issues later is a dangerous gamble, and that they should instead focus simultaneously on the size of the pie and its distribution. I call this a macro-distributional view for short.
Economics and economists (not just at the IMF, but generally) came under fire after the crisis because their models paid insufficient attention to linkages between finance and the real economy— between Wall Street and Main Street to use popular parlance, or macro-financial linkages in the jargon of economists. Yet in my view, insufficient attention to macro-distributional linkages, between the size of the pie and each household’s piece of the pie, was just as important. And while economists have emphasized the risk of secular stagnation (a prolonged deficiency in aggregate demand and negligible economic growth) in the wake of the crisis, the risk of secular exclusion (when growth accrues only to those at the top of the income distribution) in many countries is probably just as salient. If median incomes stagnate, and income polarization intensifies, there is even a risk of a vicious cycle between secular stagnation and exclusion as those at the bottom lack the resources to support demand and growth.
