By: Annette Brinckerhoff
A recent study my the IMF disproved theories of trickle down economics, and asserted that growing inequality leads to a decrease in economic growth. The study urged nations, especially those with developed economies, to focus on the poorest 20%. The report showed that decreased labor standards and other regulations on banks and business led to greater inequality, which in turn has negative effects on growth. This is the exact opposite effect of what many leading traditional economists argued would happen.
“If the income share of the top 20% increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20% is associated with higher GDP growth,” said the report.
For those of us left of center, who have been arguing this since Reagan’s deregulation policies began, this acknowledgement by the IMF is encouraging. The IMF recommended increasing reliance on wealth and property taxes, employing a more progressive income tax, removing loopholes for the rich to avoid taxes, increase efficiency of social benefits, and provide incentives to work and save.
Millionaires are expected to control nearly half the worlds personal wealth by 2019. That means 17 million people, .002 of the worlds population, will control half of its personal wealth. A trend that will only continue to grow as the middle class, which stabilizes the worlds economy is hollowed out. The world is stopping to be divided between north and south, developed and developing, instead there is a socioeconomic divide which will determine our collective future. The wealthy in the developed world will collect more wealth as the poor get poorer, and the rich in the developing world will become more rich as their poor get poorer, and the gap will continue to grow until there is a massive base of poor serving a small portion of wealthy. This cannot be allowed to continue and evolve to unsustainable levels, which we cannot return from.
The IMF is a powerful economic institution, and this report has been quite revolutionizing in the world of main stream economics. At a domestic level, it disproves the fallacies of politicians manipulating their constituencies, feeding them lies on trickle down economics and the benefits of deregulation. At an international level, it undermines much of the strategy employed by the Bretton-Woods institutions, including the IMF. Understanding the implications of this report will bring around the first steps to a stable economic future.