Growth or Equality?
(This one I'm for real)
Whenever you start talking about growth usually someone chimes in with a "But what about inequality?". The World Bank and other international agencies used to be a lot more focused on income/consumption growth alone but after a decade or two of criticisms they've redefined their goals to make them more "fuzzy" (which of course is a preemptive strike against potential criticisms). Now if you read WB
reports, etc. there's a lot more talk about "empowerment", "development" and of course "inequality". (As an aside, some of the shift in focus of the WB
is probably good and like any big bureaucracy they can use a tongue lashing every once in awhile)
Anyway (Man, I suck at intros), here's an argument why we should focus on growth.
1. Assume that both growth and equality are "goods", that is, other things equal we'd like to have more of both of them. Higher growth raises income, lifts people out of poverty and makes life a bit less nasty and brutish, as well as longer. Equality...well I assume it's a good partly because I want to argue that we should focus on growth anyway. But one can invoke the (Classical) Utilitarian
justification of Diminishing Marginal Utility of Wealth which states that a dollar to a rich man is worth less then a dollar to a poor man. This is the original 19th
century justification for egalitarianism
Given that both growth and equality are goods we can think of them in terms of indifference curves. In other words we can keep social well being constant by trading of between the two. If we make the society a little more unhappy by making it more unequal, we can compensate
it back to the previous level by giving it some more growth (of everyone's
income) - and vice versa
. This basically means that the indifference curve for the two has the standard concave, downward sloping shape:
So equality as measured by say, the Gini coefficient
, is on the x-axis and the growth rate of income/consumption growth is on the y-axis, blue guys are the indifference curves along which social well being is constant and the red arrow is the indirection in which utility is increasing - higher indifference curve means more social well being.
Note that this is just about preferences and it doesn't say anything about whether growth CAUSES inequality or inequality CAUSES growth.
But aren't they related? Probably. Take a look at this Policy Brief no. 4
(not linking directly to avoid pdf
your browser). Don't have to read all of it, just scroll down to page 28, Chart 3. The point here is that both high-inequality and high-equality are bad for growth. At high inequality you get social conflicts, envy and KUWJs
effects. At high equality there seems to be little incentive for innovation, plenty of free riding and other problems. Growth is highest at an intermediate level of inequality/equality.
We can take that graph (which is basically the Kuznets curve
in terms of growth) as a sort of structural/technological constraint which describes the possible combinations of growth and equality available:
Now we do the standard thing and find the highest indifference curve subject to the structural/technological constraint:
The important thing to note is that with a convex constraint which looks like it does, the optimal level of growth is going to be pretty close the maximum achievable growth (depending on how slopes work out exactly it might be THE maximum) while the optimal level of equality is intermediate.
If you try to push equality too far there'll
be a high cost in growth and as long as you think both of these are good the trade off becomes not worth it for all but insane egalitarians
. On the other hand picking the maximal growth might be sub-optimal but the deviation from optimum is likely to be small.
So sorry egalitarians
, even if you're very egalitarian
, growth trumps equality.
*Note - strength of society's preference
for equality would be measured by that stinky parameter "eta" that pops up all over the place - the inverse of marginal rate of intertemporal
substitution, the risk aversion coefficient, the measure of egalitarianism
. However no matter how high the eta, that indifference curve is still downward sloping and concave.
Also note that this is somewhat related to the growth vs. fluctuations issue - at least the indifference curve part. The constraint may look different (and in fact usually it's assumed that the trade off is a monotonic one between mean and variance so the constraint may be upward sloping)