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Inequality on the G20 agenda? Obama and the Pope would probably support that

Inequality on the G20 agenda? Obama and the Pope would probably support that
Published 15 May 2014 

Will Prime Minister Abbott be discussing inequality with fellow G20 leaders when they gather in Brisbane this November? 

He would if civil society and the labour movement had their way. The C20 (civil society) has 'inclusive growth and employment' as its top priority for the Brisbane summit. The Trade Union Advisory Committee's statement to the recent OECD ministerial meeting referred to G20 Labour and Finance Ministers in 2013 recognising the dangers of rising inequality and the need to move to inclusive growth.

Inequality would certainly be on the agenda if Thomas Piketty had a say, the French economist whose best selling 700 page book on inequality is making waves. Stephen Grenville noted in his review of Piketty's 'tome' that it has received widespread praise, even being described as 'one of the watershed books in economic thinking'. Dani Rodrick, a distinguished academic with a major international reputation in his own right recently said that 'I get the same question these days wherever I go and from whomever I meet: what do you think of Thomas Piketty?' 

Piketty's work focused not just on income inequality but also on wealth. His basic point is that we are heading back to the levels of inequality not seen since the 'Gilded Age' of the late 19th century, and that we should do something about it, maybe by imposing worldwide taxes on capital transfers and wealth.

Inequality would likely be on the agenda for Brisbane if Pope Francis was involved, for he recently tweeted that 'inequality was the root of all evil'. Winne Byanyma, head of Oxfam International, said in reference to the comments by Pope Francis, 'even God is on our side'. You could also assume that inequality would be a hot topic if President Obama was there, for like the Pope, he has been saying a lot about the evils of 'dangerous and growing' inequality in the US, mentioning the word 26 times in his latest State of the Union address.

So will the Prime Minister lead a discussion about inequality with G20 leaders when they discuss their strategies to increase global growth by two percentage points, in line with the commitment by G20 Finance Ministers at their February Sydney meeting? He should. [fold]

Recent work by the IMF suggests inequality is a drag on growth. While Piketty is getting the rock star treatment, the IMF's findings are probably more important because they are helping to 'mainstream' the need to consider inequality as part of 'traditional' economic management. As the IMF Managing Director recently said 'put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term'. 

The debate on inequality versus growth has been around for a long time and the accepted view was that some inequality was needed to provide incentives for growth though entrepreneurship and innovation. Based on the work of Arthur Okun in 1975 (Equality and Efficiency: the Big Tradeoff), it was generally assumed that redistribution hurts growth as higher taxes and subsidies dampen incentives to invest and work. 

However, the recent detailed work by the IMF, particularly the paper by Ostry, Berg and Tsangarides, takes advantage of new data sets to look at the relationship between inequality, redistribution and growth. They find that inequality is a robust and powerful determinant both of the pace of medium-term growth and the duration of growth spells, even controlling for the size of redistributive transfers. This last point is important. The Fund finds little evidence for growth-destroying effects of fiscal redistribution at a macroeconomic level. As the IMF authors conclude:

It would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable. 

The bottom line is that concerns over inequality come not just from moral viewpoints, but from a hard-nosed economic perspective — it can be bad for growth. The IMF managing Director has said that she is often asked why the IMF bothers about inequality because it is not the core business of the Fund. Her response is 'well sorry, it is also part of our mandate. Our mandate is financial stability. Anything that is likely to rock the boat financially and macroeconomically is within our mandate'.

So inequality should be on the agenda for the Brisbane Summit, although it is not yet acknowledged as being an issue in the material and the statements coming from the G20 presidency. But when the leaders discuss the measures in their growth plans (such as labour reforms, social safety nets, education, the role of minimum wages, infrastructure investment, tax reform and so on), the impact on inequality should be a consideration. Moreover, the work on combating tax evasion and avoidance should also be anchored in concerns over promoting greater equality within economies. And the G20's development agenda should be focused on reducing income disparities between economies, because that is good for global growth.

Paul Krugman said that Thomas Piketty's work will change the way we talk about inequality. But before changing the way it is discussed in the future, the G20 has to first start talking about the impact of inequality on growth. Let's hope there is a good conversation on the issue in Brisbane.

Photo by Flickr user marsmettn tallahassee.

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