April 7, 2014


Is our focus on economic growth hurting employment? It's time for a new approach (Mark Thoma, 4/07/14,The Fiscal Times)

In the past, the focus of supply-side policies has been to remove tax and regulatory distortions that prevent capital markets from functioning efficiently, to promote saving and investment, and to lower the taxes on corporations and the wealthy.

Those efforts will surely reemerge as the focus turns once again to growth (though hopefully we've learned something about deregulation). But there will be something new this time around, and it will be driven by the political left.

Increasingly, the idea that the ever-growing inequality can be harmful to economic growth has been taking hold. As I pointed out in my last column, Joseph Stiglitz explains one way that rising inequality can have a negative impact on economic growth:

Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth. [The Guardian]

Or, to give another example of how reducing inequality can promote growth, if wages were higher, would we see such a large number of permanent dropouts from the labor force, a drag on economic growth? As Atif Mian and Amir Sufi document, ever since 1980, the tight link between the growth in productivity and median household income has been broken. Gains from growth that used to flow to typical households now end up at the top of the income distribution. Wouldn't a more equitable distribution of the gains from growth motivate people to remain in (or return to) the labor force?

For yet another example, if a larger share of the gains from growth had gone to lower income households, how much better off -- healthier, better educated, and more productive in the future -- would our children be? How much faster would the economy grow if more children were able to reach their potential?

Of course a focus on growth hurts employment, just as a focus on employment hurts growth.  Once we accept this truism, it appears obvious that the best way to distribute wealth is not through employment.
Posted by at April 7, 2014 7:00 PM
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