The economy is a top concern for politicians and presidential candidates like Hillary Clinton and Jeb Bush. But whose economic interests should matter most to them?
According to the authors of a new discussion paper published by the International Monetary Fund, it is the poor and the middle class who deserve the most attention from politicians and policymakers. The paper's authors presented many shocking facts to make their case. Below are four excerpts from the paper.
There are many types of inequality, but they all connect to opportunities:
The discourse on inequality often makes a distinction between inequality of outcomes (as measured by income, wealth, or expenditure) and inequality of opportunities―attributed to differences in circumstances beyond the individual’s control, such as gender, ethnicity, location of birth, or family background. Inequality of outcomes arises from a combination of differences in opportunities and individual’s efforts and talent.
At the same time, it is not easy to separate effort from opportunity, especially in an intergenerational context. For instance, parental income, resulting from their own effort, determines the opportunity of their children to obtain an education.
It is in this spirit that Rawls (1971) argued that the distribution of opportunities and of outcomes are equally important and informative to understand the nature and extent of inequality around the world.
The middle class grows when labor income is distributed:
A shift in the allocation of labor income towards the higher and lower ends of the distribution has resulted in a shrinkage of the income share accruing to the middle 20 percent in many advanced economies (Australia, Canada, and Sweden are important exceptions), and some large emerging market economies (Autor, Katz, and Kearney 2006; Figure 7). Indeed, pretax incomes of middle-class households in the United States, the United Kingdom, and Japan have experienced declining or stagnant growth rates in recent years. Additional pressures on the middle class reflect a declining share of labor income—the predominant source of income for the majority of households.
Indeed, average wages have risen at a slower pace than productivity growth amid large economic rents (for example, high profitability and large increase in executive compensation) accruing to the top end of the income distribution.
The distribution of income is crucial because trickle-down doesn't work:
Specifically, if the income share of the top 20 percent (the rich) 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 percent (the poor) is associated with higher GDP growth.
The poor and middle class matter because inequality limits economic, social, and political progress
It's not the wealthy or corporations who deserve policymakers' primary attention, the authors conclude. The IMF is highly unlikely to accept the global wealth taxes put forth by Thomas Piketty in his book Capital in the 21st Century, but the authors propose focusing on those struggling economically:
The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.
... Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.
Read how income inequality has changed the world: