Current Event Economics

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CurrentEvent Economics

Thearticle in question is titled, howinequality affects growth, onthe EconomistMagazineby R.A. It was art of usual column series in the Economist magazinecalled TheEconomist explains, inwhich different economic concepts are explained (Nahum1). According to R.A., income inequality is one of topmost agendas inmany countries in the world. The author cites different worldleaders who consider income inequality as greatest concern and theroot cause of world problems (Nahum1). The first leader mentioned in the article is Hillary Clinton, thecurrent top contender of the U.S. presidency and a former secretaryof state. Clinton’s speech in a campaign event on June 14this cited as an example of her recent engagements that show hercommitment to addressing income inequality if she becomes thePresident of the United States. Another world leader mentioned inthe article is Pope Francis. The article predicts that Pope Francisspeech on June 18th,which the author calls “an encyclical, a high-level Vaticanpronouncement”. In the speech, Pope Francis was expected issuesrelated to global income inequalities that he though could be thesource of different challenges the world is facing in the 21stCentury.

Theauthor of the article also discusses an IMF study that was releasedon June 15thbyeconomists in which they assessed the possible causes and likelyconsequences of increasing levels of income inequality across theworld (Nahum1). The authors agreed that the rising income inequalities could causemany problems across the world from social, political, environmentaland to economic challenges. However, the IMF economists contendedthat governments from all countries in the world should be moreconcerned about the impact of income inequality on growth rather thanany other of its direct consequences. The author reports thefindings of the IMF economists that stated that a one percentageincrease in the income of top 20 percent of the richest people in theworld has the potential to drag down growth by 0.08 percent. In fiveyears. At the same time, the IMF economists also found that when theincome of the bottom 20 percent increases growth also increases bythe same percentage. The author notes that income inequality dragsdown economic growth through such as issues as the poor members ofthe society not accessing health care hence, reducing theirproductivity. Reduced income for the poor also reduces access toeducation and a reduction in financing investments. The authorsubstantiates the latter by quoting Dani Roderick of the Institutefor Advanced Study in Princeton how says that income inequality reduces public confidence in policies that aim to stimulate growthsuch as free trade and economic integration. Other ways that theauthor thinks inequality impedes economic growth include: it reducesthe ability of the poor to save and stagnates consumption. Finally,the author suggests that the best way governments should respond tothe rising levels of inequality is through income redistributionwhere the rich are tax more than the poor.

Theauthor of the article discusses an important topic in economics:income distribution (Nahum1). According to the class readings, it is important to understand theway income is distributed in the society because income is animportant aspect in determining the living standards of thepopulation. However, during class discussion on income distributiona very important came up that was thought-provoking. Although incomeis an essential part of household’s economic conditions, it isdifficult to ascertain whether the being in high income grouptranslates to more happiness(Champernowneand Conwell 23). It has always been difficult to explain therelationship between income and individual economic well-being. Thesupposed relationship is that income leads to consumption of goodsand services, which then translates to economic welfare. Asdiscussed in class, there are theoretical and practical problems witheach of the two links, and the elusive concept in the economicwelfare of households.One of the difficult problems in explainingthe relationship between one’s position in the income scale witheither the levels or units of measurement of the welfare scales ofany two people. Nonetheless, it is partially possible to comparepeople of a similar type through rough comparisons. The general rule,in this case, is that the person who customarily spends more on theirown consumption has the greater economic welfare as far as economicinequality is concerned. The essence of the comparison is that aslong as the prices facing the two people are approximately the sameand the patterns of expenditure similar, it is possible to comparethe amounts of goods they bought.

Thecaveat to making comparisons between income distribution and thequality of economic welfare is that the quality of data on thedistribution of consumption or expenditures is likely to lessreliable than data on income distribution. To find more accuratedata that can help analysts determine the impact of incomeinequalities on economic welfare, focus should be on periods morethan a year. Even as leaders around the world continue to payattention to income inequality, more attention should be on the jointdistribution of wealth and consumption.

WorksCited

Champernowne,D G, and F A. Conwell.EconomicInequality and Income Distribution.New York: Cambridge University Press, 1997. Print.

Nahum,R.A. How inequality affects growth. TheEconomist.2015. Available at

http://www.economist.com/blogs/economist-explains/2015/06/economist-explains-11

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