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Inequality divides economic experts too

Klaus Ulrich / jtm
March 23, 2016

Inequality has been a much-debated issue in German society. Analysts are staking sides over the growing gap between rich and poor. While some see society on the brink, others sense a marketing trick.


Inequality has long been a burning issue in Germany, and another load of publications is stoking the fire.

German weekly newspaper the "Frankfurter Allgemeine Sonntagszeitung" has started to run a series of responses to "the fundamental question" - at what point does inequality become morally reprehensible? Included is an excerpt from "Verteilungskampf," or "Battle of Distribution," by the director of the German Institute for Economic Research, Marcel Fratzscher. To him, the pretty picture of Germany as an exemplary welfare state is nothing but "an illusion."

The day before Fratzscher's book was published, the weekly news magazine "Der Spiegel" ran a cover story on Germany, "The divided nation." According to the article, the economic theory on which our market economy is thought to rest is actually beginning to tremble.

Most economists still believe that a certain gap between the rich and poor remains a necessary motivating factor in spurring growth, innovation and progress. But the idea is spreading that too much inequality could hurt the economy instead.

A lose-lose situation or a necessary evil?

According to "Der Spiegel," it was the International Monetary Fund that first drew attention to the relationship between growing inequality and reduced productivity. Later, the OECD estimated that in Germany alone such losses amounted to 6 percent of its GDP.

These studies though are not without their critics. The Cologne Institute for Economic Research (IW) has concluded in a recent study that the subject matter is "too complex for such simple truths."

The IW's analysis agrees that inequality can have a negative impact on growth. But rather than this being a general rule however, it estimates that the connection applies only to countries with per-capita GDPs below $9,000 (8,500 euros). In such countries, the poor are likely denied a proper education, and the social system is generally instable.

Interview: Is inequality increasing?

On the other hand, the correlation between inequality and growth in industrial countries like Germany is, at worst, immeasurable. It could actually be a boon, because inequality raises the incentives for entrepreneurship and innovation - as long as inequality does gain the upper hand. What exactly qualifies the upper hand, though, remains an open question.

Quantifying the limit

To quantify the "upper hand," the IW turns to the Gini index - a commonly used measure of wealth inequality.

The IW has calculated that inequality likely begins to hinder economic growth once a country's Gini coefficient reaches 0.35. Everyone receives the same income at a measure of 0; one person rakes it all in at a worth of 1. The primarily Western countries belonging to the OECD average 0.32. Germany comes in below at 0.29. The US doesn't fare so well, at 0.40.

According to the IW study, inequality in Germany rose markedly from 2000 to 2005, a period of poor growth. But it says the rise in inequality ran parallel to - not in front of - the tough economic times, and therefore it does not serve as an explanation for them. Furthermore, inequality led in no way to an increasingly destabilized society. At hardly any point were worries about the economic situation lower than they are today.

Infografik GINI-Index Einkommensverteilung Englisch

Just this week, Germany's Bundesbank added to the chorus, publishing an investigation on the distribution of wealth in Germany. Using figures from 2014, the study found that the richest 10 percent of households possessed nearly 60 percent of total net wealth. In comparison, the poorest half scraped by with barely 2.5 percent.

'Marketing ruse'

Still, in their entry for the "Frankfurter Allgemeine Sonntagszeitung," top economists Lars P. Feld and Christoph M. Schmidt wrote that the available data on inequality in Germany forms "an unspectacular picture."

They see the repeated evocation of a growing social gap as nothing but a "marketing ruse." The publicity - sometimes with full awareness - "distracts from the actual problem of state action, which has less and less power to prioritize the attainment of a country's future economic potential." Be careful not to fall for the diversion, the economists warn.

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