The Inequality Fetish

From NCPA

According to liberals, either the 2008 financial crisis and its attendant recession, or the sluggish recovery -- and maybe both -- can be attributed in large part to the high level of economic inequality in the United States. In this view, inequality is an economic malady on its own, even in times of prosperity, says Patrick Brennan, a William F. Buckley Fellow at the National Review Institute.

This narrative has been latched onto by many in the field of economics, who then attach their names to the legitimacy of the narrative. The problem, however, is simply this: there is no real evidence that a nation's income inequality either dampens economic growth or worsens financial crises.

• The best evidence for a causal link between inequality and economic growth, which provided fodder for so many subsequent claims by progressives, is an International Monetary Fund paper that suggests economic booms last longer and are steadier in countries with less income inequality.
• This study, however, relied upon case studies of countries like Cameroon and Colombia, which have a number of idiosyncrasies and such severe income inequality that basic economic theory predicts adverse economic outcomes.
• When this sort of study is confined to relevant nations, such as those industrialized countries of the 20th century, no such correlation is found.

There is also almost no evidence that economic inequality causes financial crises.

• As a recent paper by Michael Bordo and Christopher Meissner argues, there is no "general relationship" between inequality and credit booms and crises.
• They acknowledge that it isn't hard to find a correlation between the two, but they assert that these two dynamics are also correlated with a huge number of other economic factors, making meaningful extrapolation impossible.
• Mark Thoma, a liberal professor of economics at the University of Oregon, supports this conclusion, admitting that there is little evidence one way or the other as to income inequalities effects on financial crises.
• Much of the evidence supposedly supporting this liberal narrative stems from the most recent recession and the Great Depression, both of which also have much more traditional, widely accepted causes other than national income inequality.

Source: Patrick Brennan, "The Inequality Fetish," National Review, June 22, 2012.