Equality, Growth, Lane Kenworthy, and the Earned Income Tax Credit

Update 10/26/2011: Lane has a great article on upping the EITC here.

I’ve long been meaning to post about the Earned Income Tax Credit (EITC), which I believe we should expand significantly. Much of my thinking on the subject has its roots in work done by Lane Kenworthy, so it’s not surprising that his latest post (on winner-take-all economies) prompted me to get verbose in the comments.

I’ll simply repeat my comments here, as always curious to know if my gentle readers think it makes any sense.

Lane sed:

A good substitute [for very rapid economic growth] might be moderately strong growth coupled with strong unions (as in the 1950s and 1960s) or low unemployment (as in the late 1990s).

I sed:

Lane, I’m surprised you don’t mention expanding the EITC, which you make such a good case for in the last chapter of Egalitarian Capitalism.

Your suggestion of “moderate growth” seems to accept implicitly that strong unions would preclude fast growth (?). That may well be true.

But I know of no good evidence (only rather hoary theory, i.e. Okun) suggesting that redistribution per se is antithetical to growth — that equity and economic efficiency collide in some inevitable zero-sum tradeoff.

In fact, quite the contrary:

1. In your paragraphs on “Left government” in the Oxford Handbook of Comparative Institutional Analysis you cite multiple studies showing that left governments correlate with faster economic growth. You cite no studies to the contrary.

2. A. In aggregate, the econometric literature (including yours) states pretty resoundingly that in prosperous countries, equality and long-term growth either correlate positively, or have no significant correlation. (My rather amateurish analysis of the Luxembourg Wealth data suggests a quite strong correlation between wealth equality and long-term growth.) B. You’ve shown that that equality is the result of redistribution, not market forces.

3. There is not a single prosperous, modern country that does not engage in massive quantities of redistribution. If that redistribution was a constraint to growth, should we not expect to have seen more “efficient” countries emerge, and surge ahead of the rest? Hasn’t happened.

Now it’s possible that prosperity breeds bleeding hearts, and that explains the ubiquitous redistribution — that if humans were more steely-eyed, we’d all be better off. But the absence of even a single exemplar makes that surmise seem . . . libertopian. (And we all know how planned utopias have turned out over the centuries.)

Here’s the possibility I’d like to suggest, that I have yet to see even considered in the professional economics literature: that a certain level of redistribution is in fact necessary for a modern, technological, high-productivity economy to thrive. The theory would probably have much to do with:

1. Maintaining and increasing aggregate demand — keeping the log rolling, and growing.

2. Increasing the amount of money circulating in the real economy, and overall monetary velocity.

3. Allocation of financial capital into productive pursuits, especially fixed capital. (IOW, money flows being directed to producers by consumers based on their wants and needs, rather than by the omniscience of a supplier elite. Wisdom of the crowds.)

4. The increasing inability in advanced economies of less cognitively blessed individuals to find work which gives them an economic claim on a decent share of our country’s spiraling prosperity, hence an income to contribute to aggregate demand and money velocity.

5. Wider distribution of the opportunity that economic security delivers — providing a safe and solid springboard and platform for tens of millions to move into more productive pursuits.

If this notion holds any water, as you’ve pointed out, the EITC could be the best vehicle for that redistribution. Friedman’s “negative income tax” with a big improvement: incentive to work. (You’ve shown in your work that more employment is key to more prosperity.)

(Should also do a campaign teaching EITC recipients that they can receive their payments on their regular paychecks. Only about 1% do. This would increase “salience,” increasing the incentive effect.)

If the EITC was sufficient to provide a guaranteed income for all who work (and especially if all had guaranteed health care [and to some extent education]), we would have much more freedom to implement more economically efficient labor and trade policies that would otherwise be draconian — at least locally (temporally and geographically).

Your work does much to put in question some key truisms of neoclassical macroeconomics — truisms that may not be truths, but that I nevertheless find lurking in, haunting, and in my opinion sometimes misdirecting your work and your conclusions.

Think of the Earned Income Tax Credit as equivalent to the turbocharger on a car — recirculating hot, volatile waste gases (i.e. financial profits on borrowed money) back into the carburetor.