New World Bank Study on Economic Inequality Challenges “Trickle Down” Models

by Vins
Published: Updated:

As a result of decades of research, economists Branko Milanovic and Roy van der Weide have found that inequality reduces economic growth. Their studies refute other economists’ claims that redistribution slows economic growth. Milanovic and van der Weide researched the effects of growth across all income levels. The two discovered that greater inequality leads to the poor being in greater debt, thus destabilizing the economy. This occurs in part because the poor are unable to buy the products and utilize the services that the rich benefit from, resulting in lower profits for the companies owned by the rich. Inequality results in reduced economic growth by reducing demand and upward mobility. The theory of “trickle down” economics conflicts with the data, undermining the theories often advocated by mainstream economists. Milanovic and van der Weide conclude that inequality only benefits the rich. Milanovic stated, “You know it used to be that the U.S. growth was pro-poor, in the sense, that the growth rates among the poor were higher than amongst the rich. Now it’s the opposite.”

Their research showed that inequality results in economic growth for the rich, not the entire society. The widely accepted belief among economists is that distribution is not a factor in economic growth. Some economists have revised their viewpoint on inequality — determining that poverty was more of a problem than inequality. Other economists claim that redistribution delays economic growth. According to these economists, inequality results in greater impoverishment, as the poor use all of their income, while the rich are able to invest and increase savings. The new data results counter these theories. In fact, inequality reduces growth. Additionally, the rich retract and hold onto their wealth in any sort of financial crisis, further increasing the financial differences. Journalist Sean McElwee writing for Salon put it this way, “In simple language: Inequality benefits the rich and harms the poor. A rising tide doesn’t lift all boats — just the luxury yachts.”

On December 4, 2014, Matt O’Brien covered the story for the Washington Post, but otherwise, the only other coverage has been by nonprofits and alternative, independent media like Inequality.org at the Institute for Policy Studies and AlterNet.

Sources:

Sean McElwee, “Income Inequality’s Sick Joke: A Rising Tide Only Lifts Luxury Yachts,” Salon, October 4, 2014, http://www.salon.com/2014/10/04/income_inequalitys_sick_joke_a_rising_tide_only_lifts_luxury_yachts/.

Branko Milanovic and Roy van der Weide, “Inequality is Bad for Growth of the Poor (But Not for that of the Rich),” World Bank Policy Research Working Paper No. 6963, July 2, 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2461941.

Student Researcher: Miranda Hill (Diablo Valley College)

Faculty Evaluator: Mickey Huff (Diablo Valley College)