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Income does not guarantee a decent life. The answer is in that sentence itself. Decent is a relative term, relative to the people around you. While there’s no particular relation between income and say, health, internationally, there is a pretty clear relation within countries. That is, inequality does matter.

Richard Wilkinson’s TED talk above goes into detail on this, with ze graphs. Perhaps he gets a bit flaky for you with the correlations between inequality and stress. Then see this from the IMF:

Somewhat surprisingly, income inequality stood out for the strength and robustness of its relationship with the duration of growth spells: a 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent. The effect is large, but is the sort of improvement that a number of countries have experienced during growth spells. We estimate that closing, say, half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a growth spell in Latin America. (IMF)

The connection of income distribution to sustained growth seems quite strong, stronger even than trade openness or strength of political institutions (not that these things are unrelated with each other).

Why?

In wonky fashion, the IMF report says that inequality may matter because it can amplify financial crisis, precipitate political instability, constrain government cost-cutting/tax raising, or simply leave too many people out of the financial system. What they are clear on is that perfect equality is not the thing, this would eliminate the incentives that make capitalist economies run. They’re saying that there’s a balance, and that balance is linked to sustainable growth.

Me, in geeky fashion, I think of economies or nations as organisms, evolving within an environment. If they evolve unequally – ie a big financial services sector, or a dependence on oil – they can prosper while the environment is good. When the environment changes, however, they may lack the diversity to adapt. Their old strengths also become weaknesses, like dinosaurs who found that being big wasn’t so awesome when there was less stuff to eat. In evolutionary terms these are called peaks and valleys, once you evolve lungs it’s not like you can go back and evolve gills if the world goes under water. There’s no Ctrl-Z on evolution.

I’m not saying we should evolve gills. I am saying that breadth and diversity of economic players can make an economy more adaptive, and less subject to the violent shocks of the business cycle. Regardless of the why, however, I think the verdict is coming in that greed is bad. Equality of opportunity is good.

Posted on Monday, October 31st, 2011 in Business, International, Statistics.