In the decades following the 1980s, free market policies dominated policy agendas across the world. The gains from growth, however, were not broadly shared within countries, as evidenced by the high levels of economic inequality in the United States and most other advanced economies. In a recent paper, a group of economists at the International Monetary Fund argue for a rethinking of the rules—actual or perceived—that guide economic policies, so that the distributional consequences are considered and addressed by policymakers.
In their paper, IMF economists Jonathan D. Ostry, Prakash Loungani, and Davide Furceri argue there are four primary reasons why it is critical to pay greater attention to how economic gains are shared up and down the income ladder. First, their research shows that economic inequality leads to lower and less durable growth. Even when growth is the primary goal, attention to inequality is necessary. Second, they find that economic inequality may lead to social tension and ultimately political backlash against free market policies, including globalization. Third, redistributive policies to curb excessive inequality tend to support, not slow, economic growth. And fourth, many aspects of economic inequality are the result of policy choices made by governments, meaning policymakers should factor in the distributional consequences when designing and evaluating policies.
A disproportionate focus on growth over distribution was solidified among economists during the 1980s with the consensus view that the benefits of growth would trickle down the income ladder. Governments and institutions such as the IMF dismissed questions of distribution as secondary to growth, based on their confidence in markets to reward everyone fairly and their belief that redistributive policies hurt growth.
Ostry, Loungani, and Furceri question this conventional wisdom by showing that high inequality is bad not only for social reasons but also for growth....
Based on their findings about fiscal consolidation and capital account liberalization, the authors ask “why support them if there are scarce efficiency benefits for them but palpable equity costs?” The answer is important because fiscal consolidation and capital account liberalization are two policies that have historically been at the center of the IMF’s economic reform agenda. This paper is one illustration of a shift in policy priorities at the IMF, where leaders increasingly recognize that liberalization and tight fiscal policy are not always suited for sustainable economic growth....A cardinal rule in conventional economics is to consider only production and consumption and to ignore distribution on the assumption that the "market forces" as "the magic of the market" lead to Pareto optimal distribution (through "trickle down"). That's magical thinking. Turns out to be "black magic," too.
WCEG — The Equitablog
Why it’s important to pay attention to distributional consequences of economic policies
Somin Park | Research Assistant to the Executive Director
2 comments:
Governments and institutions such as the IMF dismissed questions of distribution as secondary to growth, based on their confidence in markets to reward everyone fairly and their belief that redistributive policies hurt growth.
Due to government privilege such as deposit insurance, lender/asset buyer of last resort, a single payment system (besides physical fiat, aka "cash") that must work through the banks or not at all, the banks extend what is, in essence, the PUBLIC'S credit but for private gain.
How can that result in just distribution of the resulting gains? Eh, Tom?
I have doubts about whether Pareto optimality equals or stems from "trickle down". The Wiki definition of PO starts, “Pareto efficiency or Pareto optimality is a state of allocation of resources from which it is impossible to reallocate so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off.”
In effect that’s saying that PO occurs when GDP is maximised, and in that situation, money can clearly be shifted from one lot of people to another (e.g. via the tax and social security system) so as to give a more socially acceptable distribution of income, but that won’t increase GDP: i.e. the population as a whole will be no better or worse off.
So trickle down is not needed to bring about Pareto optimality plus a socially acceptable distribution of income.
I.e. the above mentioned “production and consumption” is paramount and the “distribution” can be ignored because tax and social security can deal with any adverse consequences there.
There’s actually been an argument in The Guardian and Financial Times on that topic recently. About 90 economists signed a letter to the Guardian saying the next governor of the Bank of England should be caring and socially concerned and should consider the equality increasing / decreasing effects of BoE policies. That idea was rejected by Tony Yates (former economics prof) in the FT and by me on my blog, who argued that a central bank should stick to trying just to maximise GDP, with any adverse effects of its actions being left to the tax and social security system. See:
http://ralphanomics.blogspot.com/2019/06/should-central-banks-be-socially.html
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