Alternate Title: It’s in Your Self-Interest to Lower Economic Inequality
Income inequality is a serious issue of our times. One can certainly argue against income inequality from a moral or altruistic viewpoint but in this article I desire to share some of my own research demonstrating it hits all of us in the pocket book. I conclude with a lesson from the Libro d’Oro, or the Book of Gold.y
I. Research Hypothesis
Here’s my research hypothesis:
The higher the level of income inequality in a country the lower the economic prosperity per person.
II. Sample, Variables and Statistical Tool of Choice
The sample is comprised of 34 OECD countries, that is, developed countries of the world, including the US. Data was downloaded from the OECD and the World Bank’s World Development Indicators.
The dependent variable is economic prosperity per person (GDP per capita, 2008) and the independent variable is income inequality, captured by the country’s Gini coefficient, 2008.
Linear regression is utilized to determine the relationship between economic prosperity and income inequality.
III. Findings
First, let’s examine the relationship between income inequality and economic prosperity per person. The following scatter plot of the data with the best linear fit suggests an inverse relationship between income inequality and economic prosperity per person.
As income inequality (Gini coefficient) increases the economic prosperity of individuals (GDP per capita) living within the country declines.
If one utilizes the regression equation of the two variables it’s possible to identify the predicted values of economic prosperity per person, given the income inequality measure. Those predicted values of prosperity are plotted against the country’s Gini coefficient to produce the following graph, clearly depicting the inverse relationship.
I should note the model is statistically significant (Prob > F = 0.0018).
We can say that higher income inequality depresses economic prosperity per person.
IV. Conclusion
Altruistic arguments set aside, income inequality hits all of us, one way or or the other, in the pocket book. Given previous documentation (Morrison, 2012) we also learned that income inequality has several other adverse consequences, among them declining economic mobility.
If one looks back in history we can find examples of high income inequality contributing to the demise of an economy. One example is documented in Daron Acemoglu and James A. Robinson’s book, “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,”
The Venetian economy in the 14th century comes to mind. In the beginning of the 14th century Venice was a rich, vibrant economy with the colleganza — an early form of an open joint-stock company — established to finance single trade expedition. The colleganza, way ahead of its time, opened the market to new entrants, providing entrepreneurs an opportunity to move up the economic ladder. It was a win-win proposition — individuals prospered and so did the entire Venetian economy, albeit the Venetian elites were the primary beneficiaries.
Then came a change that contributed to the collapse of Venice as an economic powerhouse. The elites in 1315 published the Libro d’Oro, or Book of Gold, an official registry of the nobility. Absent your name in the Libro d’Oro you couldn’t be a member of the ruling oligarchy. It was known as the La Serrata, or the closure. Closure not just to the desired social registry but it soon became an economic closure, cutting off commercial opportunities for new entrants, thereby stifling entrepreneurship, increasing economic inequality and depressing upward mobility. Over time the colleganza was banned. Certainly the end of the colleganza was not the only reason for the economic decline of Venice by 1500 but its contribution to the decline can not be dismissed.
V. The Lesson
Elites acting in short term, self-interests can contribute to their own and society’s downfall. Let’s not forget Santayana’s advice, “Those who cannot remember the past are condemned to repeat it.”
Reference
Acemoglu, Daron and Robinson, James A. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Random House Digital, Inc.
Morrison, Michael C. (2012). The Inverse Relationship between Inequality and Economic Mobility Threatens the American Dream.