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Sunday, January 20, 2013

Inequality, Growth, India and China

The Sunday New York Times's Sunday Review section features on its front page a piece by Joseph Stiglitz, reiterating his oft-iterated opinion that income inequality in the US retards overall economic growth.

The back page of the same section contains an op-ed by Steven Rattner in which he notes that China's economy is growing far faster - indeed, 50% faster - than India's.  Measured in dollar terms,  China's average GDP per capita is more than twice India's.

Rattner's piece is about one-quarter the length of Stiglitz's, but appears on a rough count to contain just as much quantitative data.

Why do I juxtapose these two, other than to praise Rattner's relatively more efficient writing style, compared to Stiglitz's repetitiveness and verbosity?  Because the data in Rattner's article disprove Stiglitz's thesis.

The Gini coefficient is the most often cited metric of income inequality.  The higher the number, the more income inequality exists in the subject nation.  Last year, the Asian Development Bank gave its estimates of the Gini coefficient for both nations: "The Gini coefficient – a key measure of inequality – grew in the region’s three largest economies: People’s Republic of China (PRC), India and Indonesia. From the early 1990s to around 2010, it increased from 32 to 43 in PRC, from 33 to 37 in India, and from 29 to 39 in Indonesia. Considering the region as a single unit, the Gini coefficient has leapt from 39 to 46 in the last two decades."  So China's has higher, and faster increasing, income inequality, yet is growing 50% faster than India.  And obviously Asia ex-Japan is the fastest growing of the major economic regions regions in the world, yet its income inequality has increased as well.  

Conversely, European nations display smaller Gini coefficients than the US, yet the US has grown faster than them consistently. 

If you read Stiglitz's article, you will note, I trust, that it does not prove his proposition at all. He merely lists a few illustrative data points about income inequality but does not show any quantitative relationship to economic growth.  The only statement that even approaches demonstrating a connection is when he notes that the 1920's were a period of high income inequality that ended in the Great Depression.  So: one whole data point.  And yet the 20's were a period of substantial economic growth, More importantly, the Great Depression and its causes have received more analysis from economists than any other phenomenon in economic history, and there is a widespread consensus that its principal causes were (1) the repayment burdens on Europe stemming from German reparation payments, and the loans Britain and France borrowed from the US and 2) monetary policy mistakes, principally  (a) maintenance of the gold standard, notwithstanding that the US started off with most of the developed world's gold and payment flows of the decade tended to send gold to just France and the US, but also b) the Bank of England's insistence on keeping sterling high, and c) interest rate cuts the US implemented late in the decade to help the UK  defend sterling, and 3) the excessive, destabilizing dependence of the developed world's banks on "hot money", short-term deposits, that the depositors of which (often foreign nationals) could demand withdrawal at the first news of crisis.  None of those have anything to do with income inequality. So there is no connection at all. 

If analytic merit were relevant, the relative placement and length of the two articles should have been reversed.