Tuesday, June 16, 2015

IMF Research On Income Inequality and Economic Growth

An IMF study on income inequality and economic growth found that increasing the income share of the top 20% had a negative effect on economic growth in 129 countries.  Moreover it found that increasing the share of the bottom 20% had a positive effect on economic growth.  It suggested several mechanisms that might explain the relationship between inequality and growth, but no clear link was evident in the data.  Nevertheless, the IMF study should put an end to the "trickle down theory" which was made popular by Ronald Reagan.  That "theory" proclaimed that increasing the income of the rich would stimulate economic growth and make everyone better off.  Reagan used his "trickle down theory" to justify steep tax cuts for families with high incomes along with the end of government regulations which were believed to constrain commerce.  The combination of tax cuts, and a large increase in defense spending, produced the largest budget deficits since the end of the second world war.  Reagan's "Morning in America" was produced by the classical Keynesian formula for stimulating economic growth through large budget deficits.

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