Last week in New York, the Ford Foundation hosted a conference with the Organization for Economic Cooperation and Development (OECD) on “Changing the Conversation on Growth: Going Inclusive.” Both are mainstream organizations, grounded in the elite consensus. Their public engagement challenging the orthodoxy that inequality is the price we pay for economic growth is important.
Writing in 1955, economist Simon Kuznets argued that at first, rapid economic growth would make inequality grow, but over time inequality would decline. It appeared to fit what happened in the United States with rapid growth at the end of the 19th century and beginning of the 20th century. That era created vast wealth for a few, like Henry Ford, but poverty for many. Then came the Great Depression.
Then income inequality moderated, and the United States had economic growth while growing more equal. The sense was that inequality wasn’t really a problem; economies would eventually revert to a more equal path.
In 1975, economist Arthur Okun suggested that measures by the government to bring about equality also made the economy less efficient; meaning there was a trade-off between growth and equality. By the mid-1970s, the U.S. economy had become much more equal, so Okun’s argument fueled a sense more equality would hurt growth.
That belief has helped shape policy thought since. A growing economy has more resources to invest in advances in science and medicine, it can support a strong defense to provide national security, and new technologies can improve life for everyone. So, whether trade deals enrich corporations, or tax cuts help the wealthy, or corporate subsidies made the rich richer, as long as it could be argued that the policies helped growth, the resulting inequality was simply the cost society should pay.
Now we are back at levels of inequality in the United States that have not been seen since the Great Depression. Many economists are re-evaluating the notion of a trade-off between growth and equality. Some argue that high inequality actually contributed to the instability that caused the Great Recession.
The Ford Foundation and the OECD have embraced the view that we should reject there is a trade-off between growth and equality. First, on ethical and moral grounds, a society that shares gains and losses more equally is superior. It is also easier to get societies to trust in government and to get social cohesion when the gains of policies are shared and the losses don’t always fall on the same people. But now Ford and the OECD are prepared to argue that there is a positive economic case to be made, that equality and growth are both possible.
This week, a group not known for being a friend to equality – the International Monetary Fund (IMF) – issued a staff paper reviewing the new economic research and added new work. The IMF is better known for being cold-hearted bankers who command countries to pay back loans regardless of the effect on government programs to help the poor. In the paper, the IMF distinguishes between inequalities that result from market activity – differences in wages and earnings before taxes – and “net inequality” after transfers, from taxes, and social insurance payments. Their conclusion is that “lower net inequality seems to drive faster and more durable growth for a given level of redistribution.” In short, trickle down is not the way to grow the economy, watering from the roots is.
It means that in the recent farm bill, those arguing to preserve full funding for the Supplemental Nutrition Assistance Program were the ones making the stronger pro-growth argument. It means that in the continued fight to extend unemployment insurance benefits, while more than 10 million Americans struggle to find jobs, is a pro-growth argument. These are not programs that are simply morally right; they are programs that, based on the best economic evidence, help provide for faster and more sustainable growth of the economy.
At the conference in New York, the OECD released a report showing the extreme income inequality of the United States. Among the OECD countries – the advanced industrial democracies of the world – the United States has the highest inequality, but for Turkey, Mexico and Chile; and since 1985, inequality in America has grown much faster than the OECD average.
So the “smart” answers on the economy are changing. Those responsible for shaping the debate of the past 30 years have come around to view things in a new light.
William Spriggs is the assistant secretary for policy at the U.S. Department of Labor. Follow him on Twitter at @WSpriggs.