Why Does Charles Lane Contrast Pro-Growth Policies With Reducing Inequality?

Charles Lane used his Washington Post column today to imply that the presidential election will be a contrast between Mitt Romney pushing pro-growth policies and President Obama trumpeting reduced inequality. While Mitt Romney's campaign will undoubtedly describe the choice in this manner, what possible basis is there for someone not on Romney's payroll to frame the choice this way?

There is no clear trade-off between growth and inequality either internationally or in recent U.S. history. Many of the countries that are performing best at the moment, such Denmark, Sweden, and the Netherlands, rank near the top in equality of income distribution. Seriously troubled countries, like Greece, Portugal, and Spain have far more inequality.

In recent U.S. history, the economy performed best in the early post-war decades when income was much more equally distributed. The major economic point at issue between President Obama and Governor Romney is likely to be the fate of the Bush tax cuts for the richest 2 percent. When Reagan lowered taxes in the 80s we got the slowest decade of growth in the post-war era until we got the Bush tax cuts in the 00s.

It would be silly to claim that the relatively bad performance of the economy in 80s was due to the Reagan tax cuts or the awful performance in the 00s was due to the Bush tax cuts, but it would take a considerable stretch to argue that cutting taxes on the rich is in general associated with better growth. While lower tax rates do have a positive effect on incentives, a large body of research shows that the potential impact on growth is likely to be small.

In short, the choice in this election is between a candidate who wants to have lower taxes on the rich and either larger deficits or cuts to social programs and public investment and one who prefers higher taxes on the rich and fewer cuts to social programs and public investment. That is the way people not working for Governor Romney would describe the trade-offs.

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written by liberal, January 03, 2012 8:18 AM

Why Does Charles Lane Contrast Pro-Growth Policies With Reducing Inequality?

Because he's too stupid and uninformed to understand the concept of economic rent, or the empirical fact that it mainly if not entirely flows to the well-off.

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written by skeptonomist, January 03, 2012 9:26 AM

One reason that people like Lane say the things they do is that economists say things like "lower tax rates do have a positive effect on incentives." Such statements are completely unjustified in view of the historical evidence which Dean himself cites in this post. In real life, as opposed to the dream world of theoretical economists, incentives are a complex matter. Any model of incentives, or any conclusions from research on a limited time interval, must be tested against the long time interval in the history of the US and other countries in which high and very progessive tax rates coexisted with high rates of growth. If you can't plug in a 91% marginal rate into your incentive model and yield a high growth rate, your model is disproven.

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written by PeonInChief, January 03, 2012 9:47 AM

Obama reducing inequality? Are we thinking of the same guy?

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written by pete, January 03, 2012 10:03 AM

In the industrial revolution, inequality grew with inventions. Now we have thousands of Microsoft, Apple, Cisco, Oracle and others who have benefited by supplying us with cool toys and greatly increasing productivity. In addition, the War on Poverty has been a huge success, no? Perverse incentives keep the poor down (but they vote democrat, no?) Median income has grown quite a bit while the inequality has grown, just a fact. Most likely as the electronic age flattens out, the dot com newly rich will dissipate their wealth, as happened after 1920. Calm down everybody.

-4

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written by Kat, January 03, 2012 10:38 AM

Who is this candidate that prefers to raise taxes on the wealthy?

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written by August, January 03, 2012 1:41 PM

@pete

Those inventions your'e talkning about mostly came because government procurement and government financed research. See Ruttans Is war necessary for Economic Growth? and State of innovation by Fred Blocl (red.). Also real wages has stagnated for most ordinary workers for the last 30 years. So you don't know what your'e talkning about. Read a book.

August...median income is up, not down...sorry to pop that bubble.
written by pete, January 03, 2012 2:25 PM

If you skip salaried folks, and focus on wages, and ignore total wages, including health care, you can get some silly results.

Regarding the government being responsible for our electronic age, I guess you mean defense spending...or NSF grants...yes some universities actually have made money of things like genetic engineering stuff. True indeed. NASA gave us Tang! However the competition for those grants, and competition in general have led to lots of cool stuff. To quote a recently passed 1r;: "Wow oh wow oh wow."

Talk to some successful entrepreneurs and ask them how much they appreciate government intervention in their business.

-1

The Dilemma
written by Jeffrey Stewart, January 03, 2012 2:47 PM

In short, the choice in this election is between a candidate who wants to have lower taxes on the rich and either larger deficits or cuts to social programs and public investment and one who prefers higher taxes on the rich and fewer cuts to social programs and public investment. -D. Baker

So the choice is between a real right wing Republican and a moderate Republican.

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written by pete, January 03, 2012 2:53 PM

Obama already caved on eliminating the Bushy tax cuts...as a lame duck would he hold the line?

Pete says we should...
written by diesel, January 03, 2012 5:05 PM

"Talk to some successful entrepreneurs and ask them how much they appreciate government intervention in their business."

Would that intervention be patent protection?

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written by Union Member, January 03, 2012 5:17 PM

Obama's a community organizer for the 1%.

diesel
written by pete, January 03, 2012 5:23 PM

Why not just say property rights in general? I think these are definitely helpful for all of commerce.

Of course, protection of intellectual property is somewhat different than protecting a home or office.

Inventors hardly make money from patents. patents are snatched by firms. It costs like $90K to register a patent. Then a substantial amount to prosecute an infringement. A world without patents (e.g., china) would be an interesting world...but China mainly steals u.s. stuff, not inventing much. Coke formula is a secret, not a patent. Its an interesting issue. I would guess most patents are not worth much...and the rate of change in electronics is so rapid their half life is muy rapido.

Also issuing a patent means a firm must allow use of the invention under fair licensing agreements, I think...and it also lets everyone know what you are thinking...that's the cost of the patent protection, the spread of otherwise private information....It is costly to get a patent, and secrets would be more profitable in the long run, if they could be kept.

Easy
written by Matt, January 03, 2012 7:01 PM

Why Does Charles Lane Contrast Pro-Growth Policies With Reducing Inequality?

What is "because the Post and its ideological sponsors pay his wingnut welfare", Alex? ;)

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written by Greg, January 05, 2012 5:08 PM

Dean Baker writes: "When Reagan lowered taxes in the 80s we got the slowest decade of growth in the post-war era until we got the Bush tax cuts in the 00s."
I believe this is quite incorrect. Average annual real GDP growth for FY 1982-1989 was 4.3%. However, I don't think Reagan's tax cuts were fully responsible. Energy prices fell dramatically during this time period, especially imported oil. The tax cuts reduced federal revenues 2.3 percentage points at most; subsequent tax increases reduced that to 1% of GDP. National expenditures on energy decreased five percentage points of GDP. It is technical information to explain but as far as I can tell I think it has been under appreciated by economists and under reported in the press.

Why Does Charles Lane Contrast Pro-Growth Policies With Reducing Inequality?

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