How the Inequality/Growth Debate Has Evolved Over Time

Ezra introduces another round in what's become a great discussion, at least to those of us ensconced in the juiciest of issues in contemporary economics -- growth, full employment, inequality.

He's got all the links you need in there... and yes, as regards the politics of fighting either inequality or slow growth, I'm a bit reminded of the classic Tom Lehrer line about the war against Franco: "though he may have won all the battles, we had all the good songs." Still, there's an important point about this part of the discussion to which I'll return at the end.

I just wanted to highlight two points made by Larry Mishel in an earlier post on this stuff. First, while today's debate asks whether inequality hurts growth, the oldsters among us remember the time when the received wisdom was pretty much the opposite: you can have strong aggregate growth or you can have equity, but you can't have both.

The idea was motivated by a lot of OECD research on "flexible labor markets" (I recall thinking this paper provided a very good look at the issue). Back in the 1980s and early 90s, OECD (and other) economists argued that the Europe generally had less inequality than we did because their labor (and product) markets were more rigid -- much more collective bargaining, higher minimum wages, stricter rules about hiring and firing. But they paid for that with lower growth rates.

A rigorous look at those claims found them to be unconvincing -- the "flexibility" turned out to be less about growth and more about distribution. Unions, for example, have been found to have little impact on growth but considerable impact on who benefits from said growth.

Thus the debate was all about whether one could push back on some of the forces driving inequality without hurting growth. Of course, that debate lives on -- think of the claims of minimum wage opponents: raise the wage are you'll hurt low-wage workers. Or tax debates: the tricklers argue that raising marginal rates on the wealthy won't help with inequality because it will kill growth.

But I think we've made progress. The fact that folks are asking good questions about the potential negative impact of inequality on growth seems to me a strong step away from the wrong direction of the old debate.

Second, a number of commentators have stressed that even if linkages between inequality and less growth are elusive, pictures like the one from EPI's Josh Bivens serve as a stark reminder of what's at stake here. As Larry pointed out:

[Bivens] used the CBO's comprehensive income data to calculate the middle fifth's income was lower in 2007 by roughly $19,000 compared to a scenario where there had been equitable growth from 1979 to 2007. Josh refers to this as the inequality tax.


Finally, on the question of what's the point of talking about any of this given the cramped politics of the moment... well, clearly progressives need to do more to create the oxygen for policies of the type I introduce here. I've been thinking incessantly on that point and will trot out some thoughts soon. But especially after reading Ezra's post, I'm charged up by the idea of a bottom-up full employment movement, i.e., a large bunch of people insisting that this be a goal that policy makers must pursue in the near term. Especially with hair-on-fire deficit reduction going out of vogue, doesn't DC need a new mantra?

This post originally appeared at Jared Bernstein's On The Economy blog.