Efficiency, Inequality and Growth
David O. Atkins is the Chairman of Ventura County CA Democrats, and a contributor to DIgby's Hullabaloo. His last visit to Virtually Speaking was focused on participation in local politics and policy. This week, we talk about recent discussions of the impact of income and wealth distribution on the US economy.
For the last 30 years the United States has been engaged in an economic experiment, testing a widely held theoretical view that a country's growth rate depends on two elements, technical change and the rate of capital accumulation. The highest long term growth rate takes place when market forces set interest rates and, equivalently, the return on capital investment. Such an allocation is called "efficient," and will lead to the highest long term economic growth rate.
However, efficiency is not the only criterion in a capitalist policy regime. A policy maker may prefer to sacrifice some efficiency, accept a lower rate of growth, in order to attain a more equal income distribution. In practice, this means establishing progressive tax structures and economic assistance for the bottom quintile of earners. This trade-off is said to be inevitable. Growing the pie as fast as possible by letting the market alone set the income distribution would lead to unacceptable social outcomes, so some moderation in growth rate would have to be tolerated to ensure a bare minimum for everyone. The classic presentation of this argument can be found in Arthur Okun's Equality and Efficiency: The Big Tradeoff
This view was (and is) widely held. The usual metaphor is a pie--market outcomes grow the pie fastest, but the proportional size of the bottom two quintiles shrink in the absence of intervention.
Liberals believe in preserving the size of the slices with strong social insurance programs for the general populace, as well as programs for the indigent. Conservatives don't object to redistribution in principle.In their view, personal responsibility comes first, and only those truly in need should receive assistance. Public social insurance programs are needlessly inefficient, and should be replaced by private insurance plans, such as Health Savings Accounts rather than Medicare and a privatized pension system rather than social security. But everybody agrees that the fastest growth is associated with market allocations of capital, markets regulated to prevent fraud and the emergence of trusts.
A recent book by Thomas Picketty, Capital in the 21st Century, (French, translation available in March) challenges this consensus. He argues that in the absence of confiscatory tax policy on high income and wealth individuals, growth is suppressed. The market efficient allocation of capital leads to a concentration of income and wealth that so suppresses aggregate demand that puts the economy on a reduced long run growth path. Market allocations of capital grow the pie more slowly than a more egalitarian wealth distribution: (pdf)
There is an extended discussion of this presentation in a Tom Edsall post at the NYT.
In a timely fashion, David Cay Johnston notes that the Founders, writing before the neoclassical synthesis came to be, were deeply opposed to the concentration of wealth in the nascent United States, citing material from The Citizen's Share.
From David, posted in Hullabaloo
And this article from the Economist on mechanization: