Equality and Growth Is Breaking Out All Over!

December 7th, 2013

Sadly, not in the real world. But in the econoblogosphere. Much of that is arguably thanks to the newly launched Washington Center for Equitable Growth.

Traveling and family time, so I can’t do a big writeup, so just a few somewhat randomly chosen links:

Brad Plumer: Is inequality bad for economic growth?

Jared Bernstein: The Impact of Inequality on Growth

David Howell: The Great Laissez Faire Experiment

Much of what we’re hearing (even from said Center) is still of the weak-kneed or even actively dismissive variety that is the best we’ve been getting out of the liberal establishment for lo these many years. But we’re starting to hear some full-throated arguments with strong theoretical and empirical grounding.

For instance here’s a new paper from Barry Z. Cynamon of the Federal Reserve Bank of Saint Louis and Steven M. Fazzari of Washington University: Inequality, the Great Recession, and Slow Recovery. Nice summary here.

We show that the rise of inequality that began around 1980 resulted in large part from a slowdown of income growth for the bottom 95 percent of the income distribution, that is, for just about everyone.

And for those who still complain that ironclad, irrefutable evidence is lacking, here’s Steve Randy Waldman explaining why you should STFU. Here just the conclusion; read the whole thing:

You can tell me the “jury is still out” on those. But the jury is not out, it never reasonably has been out, on the reality of distribution-related MPC effects. I’ll disagree, respectfully, if you claim that for supply-side or libertarian reasons we should ignore that reality and prefer other means of supporting demand (or that we should not worry about supporting demand at all). But don’t say “it’s unclear” whether income distribution affects aggregate demand, holding other factors constant. Of course it does.

Or in my words, the arithmetic of income/wealth concentration and the MPC effect is straightforward and inexorable. (But of course that doesn’t mean it’s the only effect we need to consider.)

In passing, he also does a much better job of eviscerating Paul Krugman’s (Milton-Friedman-based) theoretical argument against what Paul calls the “underconsumption” theory than my feeble effort (though do look at the graphs in that post).

Of course, you had to be an idiot to believe that the Permanent Income Hypothesis fully accounted for MPC effects. Undoubtedly consumption smoothing explains a part of cross-sectional variation in marginal propensities to consume, but you don’t need careful empirics to prove that it can’t explain all of them. Why not? Because not consuming leaves a residue, something called savings, which becomes wealth. If across the income spectrum everyone spent and saved in equivalent proportions, we’d expect no cross-sectional variation in terminal wealth as a proportion of lifetime income. But in real life, much of the bottom of the income distribution dies with zero or negative wealth (i.e. they stiff their creditors), while those near the top of the distribution leave large bequests. An intergenerational Permanent Income Hypothesis could only explain this if poorer people expect their kids to be much wealthier then the children of moguls. Which is not so plausible.

Cross-posted at Angry Bear.

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