December 20, 2011
Charles Lane tells Washington Post readers that:
“Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth. Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece.”
An argument based on a sample of one may fit the standards of the Washington Post, but it is not the sort of thing that normal people would find compelling. If we look the IMF’s data on per capita GDP growth since 1980 one would be hard-pressed to find a clear relationship between inequality and growth.
The United States, an outlier for being unequal, does do relatively well in this picture. However, the much more egalitarian Swedes and Dutch fared even better by this measure. In fact, the per capita GDP growth record of most West European countries was not very differently from the U.S. over this period.
It is also worth noting that most Western European countries took much of the gains of higher productivity in the form of shorter work hours. It is now standard across the continent for workers to have 4-6 weeks a year of vacation. As a result of more vacations and benefits like paid family leave and paid sick days, the average work year for workers in West Europe is around 20 percent shorter than for workers in the United States. When we adjust for hours worked, it would be difficult to identify any growth dividend in the United States from its greater inequality.
The fact that there is no clear link between inequality and growth suggests that inequality is the result of the institutional and political structure, not the dynamics of the economy. For example, in the United States we allow banks to enjoy the benefit of too big to fail insurance from the government, which means that they can take big risks with money borrowed from creditors. When the bets pay off, the executives get huge paychecks. When they don’t, the taxpayers get the bill. This policy promotes rent-seeking, not growth.
Also, unlike Europe and Asia, we have rules of corporate governance that allow top executives to rip off their corporations by paying themselves huge salaries, even when they fail. This policy also does not contribute to growth.
We also have a policy of making it difficult for foreign professionals to compete with highly paid professionals in the United States. This raises the cost of health care and other services, by forcing people to pay more for doctors, lawyers and other highly paid professionals.
And, we have a policy that gives patent monopolies to drug companies. This allows the drug companies and their top executives to make large amounts of money at the expense of patients. These monopolies increase the annual cost of drugs by more than $250 billion a year, approximately 5 times the amount at stake with the Bush tax cuts to the wealthy.
These and other policies that redistribute income upward do not promote growth. Unfortunately, these policies will almost never be discussed in the pages of the Washington Post which restricts itself to the sort of simplistic growth versus inequality nonsense presented by Lane.
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