More Equality or More Growth?

The Economist writes,

Up to a point, spreading the wealth around carries no growth penalty: growth in income per person is not meaningfully lower in countries with more redistribution. But economies that redistribute a lot may enjoy shorter growth spells, the authors reckon. When the gap between the market and net Ginis is 13 points or more (as in much of western Europe) further redistribution shrinks the typical expansion. The authors caution against drawing hasty conclusions. Details surely matter; nationalising firms and doling out profits would presumably be worse for growth than taxing property to fund education.

​Inequality is more closely correlated with low growth. A high Gini for net income, after redistribution, corresponds to slower growth in income per person. A rise of 5 Gini points (moving from the level in America to that in Gabon, for instance) knocks half a percentage point off average annual growth. And holding redistribution constant, a one-point rise in the Gini raises the risk an expansion ends in a given year by six percentage points. Redistribution that reduces inequality might therefore boost growth.

Basically, a high level of inequality or an extreme level of redistribution can both lead to slower growth within countries.