April 22, 2011
HAPPILY...:
Is Equity the Superior Growth Model? (Sarah Treuhaft, David Madland, April 22, 2011, American Progress)
Though some empirical research suggests that inequality is good for growth, a large body of research has found the world to be much more complicated. One significant strand of research finds that there is no tradeoff between equity and growth. In their frequently cited historical analysis, Peter Lindert of the University of California, Davis, and Jeffrey Williamson of Harvard University examine the U.S. economy since colonial times and the British economy over a similarly long period and find no pattern between growth and equality. Instead, they argue that inequality is driven by the supply and demand of labor and capital.Similarly, researchers such as Oxford University’s Tony Atkinson, Princeton University’s Jonas Pontusson, and Walter Korpi of the Swedish Social Institute have all separately examined whether welfare states designed to increase equality harm economic growth. They all have found strong evidence that it does not.
Perhaps most importantly, a growing body of research argues that inequality is actually harmful to economic growth. Harvard’s Philipe Aghion finds that inequality is negatively related to growth and argues this is largely because of imperfect credit markets that prevent the nonwealthy from making significant economic contributions. And New York University’s William Easterly argues that societies that are not economically polarized have higher levels of growth because they have better institutions and higher levels of human capital accumulation. Easterly analyzed data from 1960 to 1990 in more than 100 countries to conclude that “middle-class societies have more income and growth.”
Then there is the work of Harvard economists Alberto Alesina and Dani Rodrik, who studied economic growth in the period between 1960 and 1985 in advanced and developing countries. They find that countries with high inequality have lower subsequent levels of growth and argue this is because the poor in unequal countries promote policies that stunt growth. A host of other researchers have similar findings and arguments.
While most of this research is based largely on analyses of developing countries, a small but growing literature specifically focusing on the United States is finding that equality is good for growth. The University of Geneva’s Ugo Panizza’s econometric analysis of economic growth among U.S. states from 1940 to 1980 shows that equality leads to growth. Similarly, in an econometric study of U.S. economic growth at the state level between 1960 to 2000, Ohio State University’s Mark Partridge found that a greater share of income going to the middle-income quintiles within states leads to higher levels of growth. And after analyzing the growth of 74 U.S. metropolitan regions in the 1980s, Manuel Pastor at the University of Southern California found that greater equality within regions (measured by poverty reductions in central cities) corresponds with stronger regional economic growth (measured by growth in per capita income).
In a paper published by the Cleveland Federal Reserve Bank, Randall Eberts of the W.E. Upjohn Institute for Employment Research and colleagues analyzed growth in 118 regions in the 1994–2004 period and found that racial inclusion and income equality were positively correlated with economic growth measures including employment, output, productivity, and per capita income. A later analysis by Pastor and Chris Benner at the University of California, Davis, found that concentrated poverty, income inequality, and racial segregation exerted a significantly stronger drag on growth in older industrial cities— the same places where growth is most needed—than on cities with stronger markets.
Although the new literature arguing that equality is good for economic growth is still in the early stages, it is clear that the old view of inequality being unambiguously good for economic growth is inaccurate. There is no need to choose between growth and equality.
...we don't have to choose between the two, when we can simply reform the social welfare net so that it boosts savings.
Posted by oj at April 22, 2011 2:46 PM
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