Monday, February 16, 2015

How Will Cities And Nations Combat Income Inequality

Passengers waiting for the train in Stamford, Connecticut
photography via Flickr/MTA of New York

Hello Everyone:

Today we are back to the growing challenge of inequality facing the United States.  Inequality is most pronounced in the largest American cities and metropolitan areas.  In an article for CityLab titled "Inequality and the Growth of Cities," Richard Florida writes, "Several recent studies (two of which I've already written about here at CityLab) have found inequality to connected to economic clustering-the very force that propels innovation and economic growth." This article looks at: the connection between inequality and economic growth whether or not economic success is tied to inequality.  To understand the connection between inequality economic growth; answer the question whether inequality is the price of economic success, Charlotta Mellander, of the Martin Prosperity Institute, "...ran a basic correlation analysis between the standard measure of income inequality based on the Gini coefficient and economic output for U.S. metro areas for two years 2006...and 2012..., as well as the change between the two to provide a measure of economic growth."  Remember, "Correlation does not equal causation, but simply points to associations between variables."

Small Cities USA Growth, Diversity, and Inequality
Charlotta Mellander generated a scatterplot chart (please click on the article link above) that graphs the link income inequality and economic output per capita for metropolitan regions in 2012.  The dots on the chart are greatly diffused and the "...correlation is weak (.13, about the same as it was in 2006, .15)."  The Bridgeport-Stamford-Norwalk, Connecticut is located far above the fit line with its combination of high income inequality and high per capita economic output.  The majority of large metropolitan areas: New York, Chicago, Houston, and Dallas and the tech hubs: San Francisco, San Jose, and Boston are place far above the line-i.e. they more unequal than what their economic growth belies.  At the opposite end of the scale, a grouping of Florida metropolitans: Sebastian-Vero Beach, Naples-Marco Island, and Gainesville-present a combination of high income levels and low economic per capita growth. However, Minneapolis-St. Paul, Minnesota, Seattle, Washington D.C. (surprising Mr. Florida) show a combination of "comparatively low levels of inequality with high levels of economic output per capita."Mr. Florida concludes that Ms. Mellander's findings are in line with an October 2008 National Bureau of Economic Research Working Paper No. 14419 by Edward L. Glaser, Matt Resseger, and Kristina Toblo (, which found a smaller negative connection between inequality and metropolitan income.

Inequality Map Distribution
A second scatterplot (please click on the article link above) illustrates the relationship between income inequality in 2006 and economic growth predicated on the change in economic output per capita 2006-12.  The fit line is basically flat representing no significant statistical association between income inequality in 2006 and economic growth 2006-12.  Mr. Florida observes,

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.

Homeless man
Further analysis is provided by a detailed 2014 cross-national study by researchers at the International Monetary Fund (  The research is based on the most current and comprehensive information set, encompassing the most advanced and developing countries, which allowed the researchers to more accurately study the relationship between inequality and economic growth in a global context.

The study authors highlight three important findings.  First, Richard Florida notes with no surprise, "...societies that redistribute more have lower rates of inequality."  Second, lower levels of net inequality, i.e. inequality remaining once redistribution policies are factored in, "...are strongly and positively associated with 'fast, durable growth.'"  Last and most important, the study reveals the effects redistribution are benign, "...meaning both the direct and indirect effects of redistribution are generally pro-growth.  Redistribution only appears to have direct negative effects in extreme situations."

Income inequality protest
Therefore, based on this information, the researchers concluded:

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 GCI and Income Inequality
Martin Prosperity Institute 
Richard Florida shares his own findings for the MPI ( on the link between "...inequality and combined economic and creative performance (a "Global Creativity Index") on a global scale in order to provide greater insight.

The MPI analysis identified no one " between inequality and economic performance, but rather distinct paths."  On one side is the low road path, evident in the United States and United Kingdom, "...where economic growth comes with relatively high levels of inequality. But on the other, is a high road path, taken by countries like Sweden, Finland and Denmark, where economic growth goes together with substantially lower inequality."

The takeaway here is: Cities and nations have a choice to make about inequality.  They can maintain the status quo, allowing the chasm between rich and poor to grow wider thus "...allowing those at the bottom to fall through the porous safety net."  Or, combat inequality by implementing redistribution policies that do not inhibit growth.  The choice is yours.

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