Saturday, November 18, 2006

Growth vs. equality, investment vs. consumption

This week there was an interesting discussion between Tyler Cowen and the Crooked Timberites about economic policies that favor growth versus those that ensure social welfare. This post at MR and this post at CT will give you the gist of the argument, which is more about relative levels of national wealth, but the underlying question is one of balancing economic growth against other aims.

There's a notion, somewhat popular among (economically) right-leaning types, that economic growth overrules almost every other concern, because in the long run even the bottom of the wealth distribution benefits more from growth than from redistributive policies. Truthfully, I don't understand this line of reasoning.

First of all, the bottom of the income distribution in fifty years consists of different people from the bottom of the income distribution now. It's unclear that the moral status of potential future people strictly exceeds that of actual present people.

Second, this whole debate is just a standard tradeoff between investment versus consumption, like any other, and in such cases some consumption is generally warranted even if it means sacrificing some investment. I could have a really awesome retirement if I decided right now to live in a cardboard box, sell my car, live on a subsistence diet, and invest all of the money I save. This policy favors economic growth, but it's also insane.

Likewise, if a family has two children named Alice and Bob, you can ensure nice retirement funds for both by making Bob live in a cardboard box in the yard, feeding him cheap bland food, clothing him in rags, and putting all the money you save into a shared retirement fund for Alice and Bob. As long as Bob stays in school, gets good grades (you can always threaten to take away his box), and gets a job, this strategy favors long-term economic growth. But that would be equally insane, and unfair besides.

Analogies based on well-known time horizons (one human lifetime) don't scale up straightforwardly to indefinite time horizons (however long humanity will be (1) nonextinct and (2) actually running the show). However, I think the core insights carry over. Poverty reduction and economic justice in the present are goods; "spending" on them through redistributive policies can be viewed as a form of consumption.* A society with vast levels of poverty or economic injustice is undignified and painful, in the same way that living in a cardboard box is undignified and painful. If society must trade off some investment for consumption to achieve what we view as an acceptable "lifestyle" today, then so be it.

Of course, this analysis suggests we should also care about economic growth: you don't want to prioritize consumption over investment in all cases. But now we're just haggling over price, if you will. In order to argue for either more growth or more of something else, you have to propose an intellectual framework for balancing growth against other values. It's completely insufficient to pull out the benefits of growth and call that a trump card.

* I am pretending, here, that redistributive policies are never investments. Of course, that's false in many cases. For example, both equalizing educational opportunity and improving childhood health clearly improve long-run economic growth. Achieving these goals in our society clearly requires some amount of wealth redistribution.


  1. What a great article. Moderation is a failing philosophy in the U.S. Almost everything benefits from balance but where is that today? Absolutism is rampant. Here you explain why a balance helps. Good job.

  2. Nearly everyone is seeking a certain QUALITY LIFE EXPERIENCE (QLE), the definition of which varies with many factors. A major factor has been the quantity and quality of goods and services (G&S) at the individuals' disposal. Over the generations, we have experienced, as a result of advancements in technology, a dramatic increase in the amount of G&S/individual which most (although not all) people view as an substantial improvement in their QLE and would like to continue this trend. An essential ingredient in technology improvements has always been capital investments. Most logical people would therefore conclude that there must be a balance between capital investment and consumption, otherwise the G&S/individual will decline. History has also taught us that the private sector (primarily the wealthy), with rare exceptions, is the only segment of our society that can achieve an optimum return on those investments. As a result, with an ailing economy, increasing taxes on the wealthy and allowing the politically motivated government to exercise more control over the allocation of wealth is the equivalent of the abandoned medical practice of bleeding the patient. To be sure, excess capital can be wasted by the private sector, but government attempts to allocate resources almost always make the problem worse. With regard to the economy, government should act like a good doctor who "first and foremost does no harm" which always means "less is more".