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Inequality and the Growth of Cities

As metro areas grow and prosper, inequality doesn't have to be a given.

Waiting for the train in Stamford, Connecticut, one of the most high-growth, high-inequality metros in the country. (Flickr/Metropolitan Transportation Authority of the State of New York)

There's no question growing inequality is one of the most significant challenges facing the United States today. And it's often most severe in the largest U.S. cities and metro areas. Several recent studies (two of which I've already written about here at CityLab) have found inequality to be connected to economic clustering—the very force that propels innovation and economic growth.

But what exactly is the connection between inequality and economic growth? Do economic success stories always have to be connected to inequality?

To get at this, my Martin Prosperity Institute (MPI) colleague Charlotta Mellander ran a basic correlation analysis between the standard measure of income inequality based on the Gini coefficient and economic output per capita for U.S. metro areas for two years, 2006 (before the Great Recession) and 2012 (during the recovery), as well as the change between the two to provide a measure of economic growth. The usual caveat applies: Correlation does not equal causation, but simply points to associations between variables.

The scatterplot below charts the relationship between income inequality and economic output per capita for metros in 2012. The dots are widely scattered, and the correlation is weak (.13, about the same as it was in 2006, .15). Bridgeport-Stamford-Norwalk, Connecticut, is well above the fitted line, combining high income inequality with high per capita economic output. Most large metros, including New York, Chicago, Houston and Dallas, as well as the tech hubs of San Francisco, San Jose, and Boston, are above the line as well, meaning they are more unequal than their economic growth would suggest. At the other end of the scale, a cluster of Florida metros—Sebastian-Vero Beach, Naples-Marco Island and Gainesville—combine high levels of income inequality with low levels of economic output per capita. Meanwhile, the Twin Cities of Minneapolis-St. Paul, Seattle and, perhaps surprisingly, metro Washington, D.C., combine comparatively low levels of inequality with high levels of economic output per capita.

These findings are in line with a 2008 study of urban inequality [PDF] by economists Edward Glaeser, Matt Resseger and Kristina Tobio, which found a slightly negative relationship between inequality and metro income, after controlling for skills.

The scatterplot below shows the relationship between income inequality in 2006 and economic growth based on the change in economic output per capita between 2006 and 2012. The fitted line is essentially flat, reflecting that there is no statistically significant association between income inequality in 2006 and economic growth between 2006 and 2012. Troublingly, the fast-growing energy belt metro of Midland, Texas, combines extraordinary high inequality with a high rate of economic growth. While not so extreme, the leading tech hub of San Jose also has relatively high inequality alongside relatively fast growth. Even more worrying, Bridgeport, Connecticut, combines a very high level of income inequality with below average economic growth. But Washington, D.C., and Minneapolis both have comparatively low levels of inequality accompanied by moderate economic growth between 2006 and 2012.

Additional perspective comes from a detailed 2014 cross-national study [PDF] by researchers at the International Monetary Fund. The research, which is based on a new, comprehensive data set spanning most advanced and developing nations, enables the researchers to more precisely examine the relationships between inequality and economic growth on a global scale.

The authors highlight three key findings. First, and not surprisingly, societies that redistribute more have lower rates of inequality. Second, they find that lower levels of net inequality—that is the inequality  left once redistributionist polices are taken into account—are strongly and positively associated with “fast, durable growth.” Finally and perhaps most importantly, the study finds redistribution’s effect to be “benign,” meaning both the direct and indirect effects of redistribution are generally pro-growth.  Redistribution only appears to have direct negative effects on growth in extreme situations.

Based on this, the researchers conclude:

It would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable … And second, there is surprisingly little evidence for the growth-destroying effects of fiscal redistribution at a macroeconomic level. … The average redistribution, and the associated reduction in inequality, is thus associated with higher and more durable growth.

The findings of my own MPI analysis [PDF] on the connection between inequality and combined economic and creative performance (a "Global Creativity Index") across nations provide additional insight here.

Our analysis identifies not a single trade-off between inequality and economic performance, but rather distinct paths. On the one hand, there is a low road path found in the U.S. and UK, where economic growth comes with relatively high levels of inequality. But on the other, there is a high road path, taken by countries like Sweden, Finland and Denmark, where economic growth goes together with substantially lower inequality.

(Martin Prosperity Institute)

What it boils down to is this: Cities and nations face a choice about inequality. They can permit the gap between the rich and poor to gape even wider, allowing those at the bottom to fall through a porous safety net. Or they can take the high road, combating inequality through redistribution and other mechanisms without giving up their growth.

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