''As inequality grows, ...the poor and rich classes expand.'

The Effects of Inequality on Global Economic Growth*

Gerry Greaves, 

DOI: https://doi.org/10.21203/rs.3.rs-1945712/v1

Abstract  below - full paper here: Effects of Inequality on Economic Growth

Abstract

'Previous efforts to determine the effect of inequality on growth, which relied on comparing growth rates of countries (or the same country over time) with different levels of inequality, have met with limited success. This paper provides a novel economic model that combines a Solow growth model with a closed 3-Equation model which includes the effects of inequality on consumer demand and thus growth. It models consumer demand using four income classes with different tax rates and propensities to consume whose sizes and incomes are determined by the level of inequality. It allows a wide range of inequality to be evaluated. This quantifies the effect of inequality on growth, but it also reveals its effects on interest rates and government spending guiding fiscal and monetary policy.

Among the unprecedented findings are 1) The maximum GDP growth occurs at a Gini coefficient of about 0.66 unless negative nominal interest rates or ongoing deficit spending is allowed; 2) Gini coefficients above 0.66 result in drastically reduced GDP caused by insufficient demand; 3) Below this point, there is excess demand which causes upward pressure on inflation and results in higher nominal interest rates; 4) At the current global Gini coefficient of about 0.62, real interest rates are near zero; 5) As inequality grows, the middle and upper middle classes shrink while the poor and rich classes expand.'

This is a preprint review and has not been peer reviewed.  License: This work is licensed under a Creative Commons Attribution 4.0 International License.