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CRF Blog » Blog Archive » Does greater equality mean a less efficient economy?

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Does greater equality mean a less efficient economy?

by David De La Torre

In Having your cake, The Economist reports that greater equality does not necessarily lead to less efficiency.

Some of today’s inequality may be inefficient rather than growth-promoting, for several reasons.

First, in countries with the biggest income gaps, increasing inequality is partly a function of rigidities and rent-seeking — be it labour laws in India, the hukou system and state monopolies in China or too-big-to-fail finance in America. Such distortions reduce economies’ efficiency. Second, rising inequality has not, by and large, been accompanied by a smaller (and hence less distortive) state. In many rich countries government spending has risen since the 1970s. The composition has changed, with more money spent on the health care of older, richer folk, and relatively less invested in poorer kids. Modern transfers are both less progressive and less growth-promoting.

Third, recent experience from China to America suggests that high and growing levels of income inequality can translate into growing inequality of opportunity for the next generation and hence declining social mobility. [more]