On inequality and consumption

A vibrant market economy benefits from more egalitarian income distribution

Inequality matters. Not just as an issue of fairness but also because a vibrant, market economy is much better off when wealth and income are spread around more evenly among the population. There are two reasons for this. First, consumption of certain goods and services “takes off” after a population reaches a certain level of income. Secondly, because the more people consume these goods and services, the more competition there is and the cheaper they become. In other words, the same amount of GDP among two populations but with vastly different distribution of income will result in vastly different consumption patterns; and consequently, production patterns as well. Let’s see how this manifests in real life.

A tale of two countries

When it comes to inequality, it’s hard to think of two regions in the world more disparate than Latin America and Scandinavia. Latin America has long held the title of most unequal region of the world, and even though most countries in the region are now considered “middle income”, a significant share of their population are still poor. Furthermore, those in the so-called middle class still have considerably lower purchasing power than a middle-class Westerner. In contrast, Scandinavia is one of the most egalitarian regions in the world thanks to a generous cradle-to-grave welfare state. When using Gini coefficients, a measure used by economists to measure inequality (with 0 being perfectly equal and 1 being perfectly unequal), Latin America tends to fall in the .45-.55 range. In contrast, Scandinavia usually ranks at .25-35. Continue reading