What these guys never seem to get is that there are different sources of inequality. Larry & Sergey did not get rich in the same way a dictator's cousin does. So analyzing what's correlated with inequality in general doesn't tell you much.
Talking about what's correlated with inequality in general is like talking about what's correlated with leaving high school before age 17. Your sample will be a mix of kids who dropped out and kids who went to college early. Most will be kids who dropped out. You'll then discover that leaving high school before 17 is correlated with all sorts of bad things. But your conclusions will be worse than useless as a source of advice for kids considering going to college early.
In Brazil in the 1970s, there was an economic philosophy that argued that 'the cake should grow before it can be divided'. Actually, what happened was that, as inequality grew, the rich changed their spending habits and industry chased after their needs, instead of expanding to fill everyone's necessities. The result was that growth eventually stopped. In 1980s Brazil you saw as many products on the shelves as you would in the eastern bloc. So yes, even if society gives everyone a fighting chance to get rich, it should take care not to let the gap widen too much so as not to shrink its own market.
> "Why does the cause ... matter if the effects of it are the same?"
The statistics do not say "no matter what the cause, the effects are identical." What they show is a tendency, not an absolute hard-and-fast rule.
I contend that, if you separated out countries with high inequality due to corruption from countries with high inequality due to innovation, you'd find that inequal-corrupt has lower growth than equal, and equal has lower growth than inequal-innovative. But since they're averaging inequal-corrupt with inequal-innovative, that effect gets hidden -- which leads to people trying to solve inequality (counterproductively!) when the real problem is corruption.
There's nothing you can do about it other than leveling the playing field by eliminating special loop holes and laws designed to protect the established elite. You shouldn't do more, technology is the root cause. An individual skilled in fully optimizing their productivity can produce far more than someone without those skills, so wealth will naturally accumulate with those individuals. It's amazing when you think about it, today I can completely design a web or mobile application, a consumer electronic device, or any number of things right from my computer, and I do on a daily basis. How much more productive am I than someone utilizing only manpower? That's the income gap disparity.
It's the same thing on Wall Street, do they abuse the system, yes, but computers allow individuals to far more access to a variety of assets around the world within milliseconds. Those with the knowledge, say like algorithmic traders can use there knowledge and the ability to leverage their positions to make a fortune.
They always look at the brackets, not the movement between them, and there's huge movement between brackets.
Makes sense. The primary driver behind economic growth is consumer spending. If there's a lot of inequality, there will be less consumer spending. What you want for strong economic growth is a large and healthy middle class, with plenty of disposable income and a willingness to spend it.
First, their data selection is skewed and relies heavily on countries with longstanding cultural problems (besides inequality) affecting their economic growth. Just look at the list of countries constituting the data for the third chart. About half of the countries are from Latin or South America too, so they haven't controlled for geographic similarities either.
http://www.imf.org/external/pubs/ft/fandd/2011/09/Berg.htm
Second, their perspective throughout the study is "top down" and makes the bold claim that data showing weak correlation is grounds for supposing strong causation. The editorialized headline from motherjones.com also makes the same mistake.
I'm not too familiar with regular IMF publications so I have no idea if politicization is common in them, but this certainly seems like a classic case of choosing the data that confirms what you already believe.
The top of the list (which the authors of the study draw from liberally) mostly consists of countries with severe economic and cultural problems in many areas. The rest of the list doesn't have a clear one dimensional trend. Some countries (e.g. Greece) with severe problems have a greater level of equality than the US, while other more stable and consistent economies (i.e. Scandinavian ones) also have greater equality.
As an example, if the authors of the study wanted to apply their methods to measure the effect of melanin on a country's growth they could just as easily conclude that a population with dark skin results in less growth. While the absurdity of the correlation=>causation fallacy are apparent in that case, it is less so when you cater to widely held beliefs that are easier to support without looking at the data thoroughly.
In Pareto distribution only the middle has strong motivation and enabling abilities (like education, etc..) to work on moving forward(up) as the bottom will not move up much despite any effort and the top have comparably much less motivation.
The sharper the Pareto (ie. the more the "inequality" perceived or real, doesn't really matter, it is just numbers describing statistical properties) - the thinner the middle.
Talking about what's correlated with inequality in general is like talking about what's correlated with leaving high school before age 17. Your sample will be a mix of kids who dropped out and kids who went to college early. Most will be kids who dropped out. You'll then discover that leaving high school before 17 is correlated with all sorts of bad things. But your conclusions will be worse than useless as a source of advice for kids considering going to college early.