Tuesday, January 03, 2006

Growth and Redistribution

Robert Lucas (via Cafe Hayek):
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
Brad DeLong:
What will the moral consequences of unequally distributed prosperity be? Friedman fears, and perhaps for good reason, that they will resemble the consequences of economic stagnation. People who feel that they are living no better, or not much better, than their parents will search for enemies: Hollywood writers, foreigners, people of “loose” morals, and Harvard graduates. And America will become a less free and less democratic society. The argument follows the lines of the argument in Thomas Frank’s What’s the Matter with Kansas? Those for whom the American market economy is not delivering increasing prosperity do not reach for the right answer: policies to strengthen the safety net, provide security through social insurance, and improve opportunity through better education. Instead, they reach for the wrong answers: closing down society and denouncing enemies—anti-Hollywoodism as the social democracy of fools, one might say.

I find myself more optimistic. This is not to say that I disagree with the political program for America today that can be drawn out of Friedman’s book: the pro-growth, pro-opportunity, pro-social-insurance policies of today’s national Democratic Party are mother’s milk to me. But I do not think we look forward to the generation of stagnation in the working and the middle classes that Friedman fears. Yes, the past generation has been a distributional disaster for America. Yes, at some point in the future the “outsourcing” of jobs made possible by modern telecommunications and computer technologies will produce enormous structural change in the American economy. But the population of the United States is growing slowly. The desirability of the United States as a place in which to locate economic activity is growing rapidly: the underlying engine of technological progress is spinning faster than it has in at least a generation. I see rising working- and middle-class incomes in America during the next generation generating what is in Friedman’s terms a virtuous, not a vicious, circle.

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