Wednesday, June 28, 2017

Michael Pettis on the Economics of Income Distribution

Michael Pettis has written an important article on whether cutting taxes on the wealthy leads to growth through an analysis, in different economic investment conditions, of the impacts it can have on economic growth and income inequality.  It is an important article, because the public discussion of this issue is obscured by the divisive ideological political debate of politicians

 who want to assert they are right without regard to  factual context situations and possible economic conditions.

The key to the impact analysis is the relationship between the desired investment and the actual investment.

If the desired investment exceeds the actual investment, income inequality will increase but cause savings and investment to increase leading to higher future growth which will eventually compensate ordinary and poor households.  This is more likely in a developing nation.

 If desired investment is broadly in line with actual investment there will be increased inequality and a permanent, in the long run, lower growth although the short term could postpone lower growth by  increasing debt.

In advanced countries, like the United States, there is no constraint on desired investment, which means income inequality can only result in higher debt or higher unemployment and slower growth.

This article by Michael Pettis is a succinct economic non-political on the economic importance of income distribution and I urge you to read the whole article and to regularly read his China Financial Markets Blog
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