Inequality is a hot topic right now. The reaction to Thomas Piketty’s Capital in the Twenty-First Century shows the rising tide of anxiety. But Mr Piketty devoted almost no attention to why inequality matters or whether the cost of reducing it might outweigh any likely benefits. This lacuna needs to be filled.
Much discussion of the book has focused on the political aspects of inequality. But the economic aspects also merit attention. To my surprise, the staff of the International Monetary Fund, the most staid of institutions, addressed these questions in February in a note entitled Redistribution, Inequality and Growth. It came to clear conclusions: societies that start off more unequal tend to redistribute more; lower net inequality (post- interventions) drives faster and more durable growth; and redistribution is generally benign in its impact on growth, with negative effects only when taken to extremes.
The conclusions are noteworthy. So why might they be true?