Tuesday, August 4, 2009

The Dumbest Thing I've Read in Awhile

. Tuesday, August 4, 2009

In a book review Lynsey Hanley of The Guardian says that economic growth should be abolished:

We are rich enough. Economic growth has done as much as it can to improve material conditions in the developed countries, and in some cases appears to be damaging health. If Britain were instead to concentrate on making its citizens' incomes as equal as those of people in Japan and Scandinavia, we could each have seven extra weeks' holiday a year, we would be thinner, we would each live a year or so longer, and we'd trust each other more.

Epidemiologists Richard Wilkinson and Kate Pickett don't soft-soap their message. It is brave to write a book arguing that economies should stop growing when millions of jobs are being lost, though they may be pushing at an open door in public consciousness. We know there is something wrong, and this book goes a long way towards explaining what and why.

Via Yglesias, who claims that equality leads to growth (which may or may not be true) but dances around the main point which is exemplified by the part I bolded: in the absence of growth, everybody is made worse off, but the people at the bottom of the social scale suffer disproportionately. When growth suffers, those with the fewest skills and lowest levels of education are the first ones to lose their jobs and homes. As Krugman noted the other day, the American economy requires a 2% growth rate just to maintain a constant employment rate, and faster growth rates are strongly associated with lower unemployment. This is especially true for those at the bottom of the social scale (including, as Yglesias mentions, unskilled immigrants from poor countries).

But even if all of that were not true, this argument still makes no sense. Whether equality fosters growth (as Yglesias maintains) or growth fosters equality (as I suspect), the richest countries in the world tend to be the most equal. The map above shows Gini coefficients for the world in 2007-2008, as reported in the U.N. Development Report (click here for a larger version). A higher Gini coefficient refers to a more unequal society. So what do we see? Countries that are rich tend to also be more equal than countries that are poor. And how to do you get rich? There is only one way: economic growth. So perhaps the best way to address within-country inequality is spend more effort trying to maximize growth. If we seek to address between-country inequality, then our only alternative is a pro-growth strategy for the developing world. And in recent times, the most successful growth models for emerging economies is to be export-led. But who buys the exports? The developed world. And how can the developed world afford to buy those exports? I think you can see where I'm going with this.

Of course, I haven't mentioned the importance of absolute as well as relative levels of wealth, the underrated benefits of compounding growth rates, the social (in)justice of legislating the preferences of some (for more leisure relative to income, say) as mandates for others, the importance of incentives, or the sheer unholy slap-your-forehead dumbness of Hanley's second sentence: "Economic growth has done as much as it can to improve material conditions in the developed countries."

No it hasn't. Not by a long shot.


The Dumbest Thing I've Read in Awhile




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