The Connection between Inequality and Economic Growth

6.6.13 | Last week, the BRR Network gathered in Washington, DC, for a closed-door symposium at the Urban Institute to discuss several new working papers (listed here).

Over the next several weeks, we’ll take a closer look at the papers, starting with “Buddy, Can You Spare Some Time? Social Inclusion and Sustained Prosperity in America’s Metropolitan Regions,” by UC-Davis’ Chris Benner and USC’s Manuel Pastor.

Like much of the BRR work in general, the authors were examining which factors in a metro region make it resilient—able either to withstand economic or other shocks or at least bounce back quickly from them. In this case, the authors looked at factors that allowed a metro region to sustain steady employment growth for at least three consecutive years.

As they write, “the headline of this work … is that regions that are more equal and integrated—across income, race, and place—are better able to sustain growth over time.”

In other words, economic inequality can make a region less resilient over time.

The authors examined the growth trajectories in 184 US regions from 1990 to 2011. They looked at a range of potential influences, including power diffusion (the balance or lack of it of political power across jurisdictions in a region); income inequality, racial isolation, educational attainment of the population, share of immigrants, whether the region was dependent on exports, the region’s employment structure, and percent of the workforce that was unionized (a measure of the “pro-growth” business climate).

Of all those, the find that “the largest and most significant predictor of shortening a growth spell is the level of inequality,

“Whatever the underlying processes,” they write, “our evidence does suggest that more equitable, integrated and spatially connected regions — which we might prefer for other reasons as well — may also be able to achieve more sustainable growth.”

This of course tips on its head the Conventional Wisdom that economic inequality is good for growth because it creates incentives to work and leads to savings. Lest one think this is simply a politically liberal conclusion, Pastor and Benner cite studies from that bastion of liberalism, the International Monetary Fund  as well as the Journal of Development Economics that draw the same conclusion.

While nationally, the realization of the equity-resilience link is just emerging, “the economic argument for coupling equity and growth has gained some analytic, policy and political ground” at the metropolitan level for some time now.

At some point one would hope, the Economic Equity-Is-Regional Resilience meme will reach a tipping point in the United States, and begin to have direct effects on elected officials’ policy-making. In pondering whether that happens before the November 2014 general election, I defer to the scene in “Ocean’s 11” where Yen emerges from the coin container inside the vault and prepares to flip backwards onto the several-feet-away shelf to avoid tripping the floor laser sensors.

“Ten says he shorts it,” says Frank, as he and Livingston watch via computer monitors from the gang’s hotel room base.

“No bet,” quoth Livingston.

Read More: A review of Pastor’s and Benner’s book on this topic, “Just Growth,”.

 

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