Re: Guest Post - Why does inequality harm economic growth?


Yeah, that's pretty good stuff, consistent with the distributional differences between the 50-60s US economy (start-stop, recession-inflation-recession, "micromanaged" by Fed) and the "Great Moderation" of 1990-2005. You will have some trouble selling this to bankers and economists, although Modern Monetary guys like Sumner might like it.

"Inflationary expectations" is so built into New Keynesian models that they will definitely assume that those expectations will get out of control with a repeat of the 1970s if we go in that direction again.

Radical Post Keynesians will say past history is no guide because the future is radically uncertain.

Marxists will say that history can't be repeated, Capital has accumulated, tendency of profits declined, and we can't go back.

Posted by: bob mcmanus | Link to this comment | 02-28-14 10:36 AM
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But I have to also note that the framework here is still Neoliberal

Where's Government? Apparently only in monetary policy.

Posted by: bob mcmanus | Link to this comment | 02-28-14 10:41 AM
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Krugman ...moving from Princeton to NYC to devote himself to studying inequality. (And selling public policy)

Posted by: bob mcmanus | Link to this comment | 02-28-14 10:52 AM
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Where's Government? Apparently only in monetary policy.

From the linked post

The IMF team also found that--within reason--redistribution doesn't seem to harm growth. In fact, just the opposite: "The combined direct and indirect effects of redistribution--including the growth effects of the resulting lower inequality--are on average pro-growth."

To pick up on the theme of the previous post, this is something we all understood back in the era when unions were powerful advocates for the middle class. Of course rising middle-class wages are a prerequisite for sustainable growth in a mixed consumer economy like ours. And the more stagnant those wages are--and the aughts were by far the worst decade for stagnant wages since World War II--the more fragile economic growth is.

From the previous post about unions:

... The heart and soul of liberalism is economic egalitarianism. Without it, Wall Street will continue to extract ever vaster sums from the American economy, the middle class will continue to stagnate, and the left will continue to lack the powerful political and cultural energy necessary for a sustained period of liberal reform. For this to change, America needs a countervailing power as big, crude, and uncompromising as organized labor used to be.

And that is a statement of pessimism, because no one on the left seems to have any serious ideas about what this countervailing power might be now that labor is a shadow of its former self. Organized labor really is unique, as Wasser suggests, and for all its problems, that's why I mourn its decline. There's no longer any serious countervailing power against the interests of business interests and the finance community, and we're paying a high price for that.

Posted by: NickS | Link to this comment | 02-28-14 11:13 AM
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Right, but it stops well short of a call for full communism.

Posted by: Moby Hick | Link to this comment | 02-28-14 11:15 AM
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"I got into a very stupid FB discussion the other day, on why poor people shouldn't just be more ambitious and go back to school, etc, if they want to stop being poor."

I got into the opposite argument -- my opponent was arguing that poor people *shouldn't* go to school, because they're too poor to pay the tuition. "What do you think they should do then?" I demanded. "Just keep working a minimum wage job forever?"

"Yes," this person said.

Posted by: delagar | Link to this comment | 02-28-14 1:18 PM
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I liked the Drum inequality post but I'm curious how far those ideas have penetrated the economics world. My impression is that neither Krugman or DeLong would agree that rising inequality could hurt demand or that the inequality was major factor in the crash and subsequent recession.

Posted by: Eggplant | Link to this comment | 02-28-14 2:10 PM
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My impression is that neither Krugman or DeLong would agree that rising inequality could hurt demand or that the inequality was major factor in the crash and subsequent recession.

I read DeLong more often that Krugman (habit, rather than judgement of quality), and I think he would agree with your statement. I would note, from the outset, that for the last several months he's been promoting the "Washington Center For Equitable Growth" as the most important current project.

But I'll look later tonight and find specific examples.

Posted by: NickS | Link to this comment | 02-28-14 5:14 PM
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So, if you were a ranting leftist, you might say that political attitudes are shaped by class, and that ideological justifications for high inequality are just a veil for class interest. You might also say that "sound" economic policies are really just policies that redistribute income upwards. And it turns out that the econometric evidence more or less supports your rant.
Krugman, two weeks ago last Thursday. He's been talking a lot about inequality lately, but not specifically its effects on growth rates.

Posted by: chris y | Link to this comment | 03- 1-14 5:20 AM
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1) "Redistribution" whatever that means, usually taxes and transfer payments, as in Basic Guaranteed Income. I, following L Randall Wray (I'll link again if you want), have tried to explain why that won't work. Pricing-power, price-making, the rentiers can raise prices and rents faster than the gov't can give money away.

I was going to link to Ukraine, but this is simpler. If you want to increase wealth, security, and income for the bottom 80%, you have to grow the commons. The vampires understand that very well, which is why...


As part of its commitments to pay down debt, Cyprus is expected to privatise three major public utility corporations, raising some €1.4bn by 2018. Those earmarked for sale include the Telecommunications Authority, the Electricity Authority and the Ports Authority.

...they are using all means possible to privatize the commons. A key tenet of neoliberalism since Thatcher in the 70s selling the railroads and yes gov't housing back to residents.

Cause once the commons, public wealth is gone, it will be sheer holy hell trying to get it back.

And a large part of the importance of common wealth was pricing power.

5: Nah, just nationalize Harvard, NBC, and Goldman Sachs. That this seems not only impossible but wicked and counterproductive shows just how deeply liberalism/neoliberalism has rotted our brains.

Saw neoliberalism neatly defined as "regulation through competition"

Posted by: bob mcmanus | Link to this comment | 03- 1-14 8:41 AM
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And frankly, I do consider taxes => transfer payments to be more monetary policy than fiscal policy, and think that is the reason New Keynesian monetarists prefer it.

It's more about increasing money velocity than providing gov't goods or services or increasing consumption.

Anyway, few economists are about increasing consumption. The point of giving money to higher marginal propensities to consume was to change business expectations and increase investment. Even Kalecki thinks that way.

Posted by: bob mcmanus | Link to this comment | 03- 1-14 8:46 AM
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