Sunday, October 21, 2012

What policy promotes economic growth (with equity)?

The Republicans seem to be arguing that if the rich get richer faster, everyone will benefit -- the trickle down theory.

At one time a large portion of Americans believed that progress for the working class was the key to economic growth.

"Henry Ford had reasoned that since it was now possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class. In the process, Henry Ford had changed manufacturing forever." (Source: The Ford Motor Company)
Alternatively today many seem to believe that economic improvement for the middle class is the path to economic growth:
"To challenge trickle-down effectively, progressives should counter with their own story about economic growth. In that story, it isn’t the rich that lead the way to growth and prosperity. Instead, it is a thriving and vibrant middle class that shows us the path. It may not seem intuitive that the concept of “the middle class” is the opposite of trickle-down and an effective counterargument against it. But it is. To understand why, we must first grasp that current thinking and rhetoric about the middle class is backwards. Politicians typically see the middle class as something to create with the gains of economic growth. But in fact, the opposite is the case: The middle class is the source of economic growth. A strong middle class provides a stable consumer base that drives productive investment. Beyond that, a strong middle class is a key factor in encouraging other national and societal conditions that lead to growth. It is a prerequisite for robust entrepreneurship and innovation, a source of trust that greases social interactions and reduces transaction costs, a bastion of civic engagement that produces better governance, and a promoter of education and other long-term investments." (Source: Democracy: A Journal of Ideas)
The people who make these arguments seem to do so, not impervious to evidence, but even uninterested in the possibility of having information to support their arguments.

It seems to me that there is a real question as to the economic climate and its influence on the proper growth strategy. Are we now in an economic climate in which rapid growth is at all possible, or are we required to hold on and ride out an unavoidable period of economic stagnation?

International development agencies have for some time sought to encourage economic growth with "pro poor policies" (e.g. this and this) suggesting that there is some independence between growth strategies and distribution strategies.

I learned about marginal utility long time ago. It seems to me that ideally, economic policy should seek to maximize utility, not GDP. It also seems to me that the marginal utility of 1,000 people below the poverty line receiving $1,000 in additional income is almost certainly greater than that of one billionaire receivingg $1,000,000 in added income.

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