The false tradeoff between growth and inclusion

Inclusive Economy15 May 2013Dean Baker

There is a common tendency to view growth and equity as competing goals, including by many of those who have strong concerns about the latter. This is unfortunate since it is likely to lead to bad policy and horrible politics.

Taking the latter point first, while it never makes sense to pursue growth as an end in itself, for the foreseeable future growth is going to be connected with the ability of the economy to generate jobs and sustain high levels of employment. In this context, attacking “growth” is telling large numbers of people that you don’t care about their well-being. While in principle it is possible to envision a society that is organized so that peoples’ income are not dependent on growth, we don’t have that society, nor are we likely to anytime soon.

Fortunately, there is nothing about an inclusion agenda that need be anti-growth and in fact there are good reasons to believe the opposite. At the most basic level, an economy that is growing and creating jobs is also likely to provide the best opportunities to improve the living standards of those at the bottom of the income distribution.

There is considerable research showing that wages for those at the bottom are highly responsive to the unemployment rate. This means that in periods of low unemployment, the least educated workers will see the largest wage gains as employers are forced to bid up the wages of even the least-skilled workers (see research from the UK by Paul Gregg and Stephen Machin (2012, pdf) and from the US by Jared Bernstein and Dean Baker (2003)). This is a strong argument that growth will lead to a more inclusive economy.

There are also many specific areas where there are strong arguments that policies that are likely to lead to less inequality will also lead to more growth. For example, there is evidence that a bloated financial sector is a major impediment to growth. While advanced economies need a well working financial sector to allocate capital from savers to those who want to borrow, when the sector gets too large relative to the size of the economy, it is simply a drag on growth (Cecchetti and Kharroubi (2012, pdf). From this vantage point, policies designed to reduce the size of the sector, such as a financial transactions tax, will help to boost growth while at the same time hitting some of the highest earners in the economy.

There is a similar story with patent protection, most notably in technology and prescription drugs. In the technology sector, patents have become a way to harass competitors rather than to advance innovation. With prescription drugs patent protection provides incredibly perverse incentive. By allowing pharmaceutical companies to sell drugs at prices that are hundreds or even thousands of times the free market price, patents provide an incentive for these companies to deceive the public about the effectiveness and safety of their drugs. The result is that not only are drugs made unaffordable for many people, but even those who can afford them may be harmed by taking a drug that is ineffective or has dangerous side effects. In both the tech and pharmaceutical sector we could likely boost overall growth and reduce inequality by eliminating patent protection and freeing the market (Boldrin and Levine (2012, pdf)).

There are areas in which a push towards a more equal inclusive society may carry some cost in terms of growth. For example efforts to shorten the workweek or work year are likely to lead to lower GDP. The main reason that the United States has a higher per capita income than West Europe is that workers in the United States work 20-25 percent more hours on average than their western European counterparts. There is certainly no ethical or even economic reason why the fact that Europeans enjoy more leisure, albeit with lower incomes, should be viewed as bad thing. In fact given the string historic link between greenhouse gas emissions and income, the fact that Europeans have opted for more leisure is the only reason we even have a chance to save the world from devastating levels of global warming.

To conclude, there is no reason that advocates of inclusion should ever place themselves on the opposite side of growth. The priority is obviously ensuring that everyone enjoys a decent standard of living, but it is simply wrong that this will somehow be better accomplished by putting a brake on economic growth.