Is There a Trade-Off Between Economic Growth and Equality?
By Randall Holcombe • Tuesday June 12, 2012 12:48 PM PST •
The American dream is moving out of reach for average Americans, according to this article, even as things have looked up for the top 10%. Statistics like this prompt calls for increasing government redistribution and more progressive taxation to level the playing field. We know that redistributive policies lower economic growth and ultimately make everyone poorer. So, why pursue them?
The pro-equality side of this argument has recognized that redistributive policies that promote equality do so by lowering economic growth, so assuming that economic growth is good and equality is good, there appears to be a trade-off between the good outcome of growth and the good outcome of equality. So, how much growth are we willing to sacrifice to get how much equality?
My own view is that I do not accept this trade-off. I don’t see any value in equality per se. It is the result of differences in capabilities, ambitions, and indeed, a bit of luck. I am sympathetic to the plight of the poor, but because they are poor, not because they are at the bottom of an unequal distribution of income or wealth. Because I see strong evidence that economic growth helps out people regardless of where they fall in the distribution of income, public policy should be pro-growth, and ignore equality issues.
An argument in direct opposition to my view is that we are so wealthy that economic growth brings no additional social benefit, and actually makes us worse off. This view argues that “...if our aim is to improve the quality of life while avoiding further damage to the planet, greater equality can do both whereas economic growth can do neither.” This argument says there is no policy trade-off between growth and equality because growth is bad and equality is good. Public policy should be anti-growth and pro-equality.
Rather than lamenting that the heavy hand of government, through taxation and redistribution programs, is hindering economic growth, this anti-growth response is that if that is true, it is also good.
Some American readers might find this anti-growth viewpoint too incredible to take seriously, but the sentiment is much stronger in Europe. Whereas in the United States redistribution programs tend to be viewed as designed to help the poor, in Europe the sentiment is much more that the goal is to create more income equality. Equality is much more a social goal in Europe than in the Untied States, and the anti-growth argument cuts the legs out from under the trade-off issue. The response to the question of how much growth people are willing to give up to get more equality is “all of it.” Equality is good; growth is bad.
A few decades ago an argument that economic growth is undesirable would have been rejected out of hand. Now, it is gaining some traction. For those who see the United States as moving toward the social policies of Europe, this is the ideology toward which we are headed.