Eric Crampton on the OECD inequality and growth report

Eric has an excellent post, here is one bit from it:

They find that net inequality (after tax-and-transfer) hurts economic growth, that gross inequality (pre tax-and-transfer) doesn’t hurt growth, that changes in human capital (education) do not affect growth one way or another – there’s a slightly negative effect of education on growth in the set of specifications, but it’s not significant; and, investment doesn’t affect growth one way or another.

The set of results is then a little surprising. We usually expect investment to matter a lot for growth – both in physical plant and equipment (investment) and in people (education). They find that neither does anything and that the only thing that matters is inequality.

Further, when they break things down a little, what seems to matter most is the difference between 4th decile income and average income rather than incomes at the top. Incomes in the 9th and 10th decile relative to average income do nothing; differences between the fourth decile and the average matter hugely.

And now we start getting into the plausibility checks. Does this set of results really make sense?

Do read the whole thing.


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