Paul Krugman: Inequality Is a Drag

Reducing inequality "can make the nation as a whole richer":

Inequality Is a Drag, by Paul Krugman, Commentary, NY Times: For more than three decades, almost everyone who matters in American politics has agreed that higher taxes on the rich and increased aid to the poor have hurt economic growth. ...

But there’s now growing evidence for a new view — namely, that the whole premise of this debate is wrong,... coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy. ...

But how is that possible? Doesn’t taxing the rich and helping the poor reduce the incentive to make money? Well, yes, but ... extreme inequality deprives many people of the opportunity to fulfill their potential.

Think about it. Do talented children in low-income American families have the same chance ... to get the right education, to pursue the right career path ... as those born higher up the ladder? Of course not. ... Extreme inequality means a waste of human resources.

And government programs that reduce inequality can make the nation as a whole richer, by reducing that waste.

Consider, for example,... food stamps, perennially targeted by conservatives who claim that they reduce the incentive to work. The historical evidence does indeed suggest that ... food stamps ... somewhat reduces work effort, especially by single mothers. But it also suggests that Americans who had access to food stamps when they were children grew up to be healthier and more productive..., which means that they made a bigger economic contribution. The purpose of the food stamp program was to reduce misery, but it’s a good guess that the program was also good for American economic growth.

The same thing, I’d argue, will end up being true of Obamacare. Subsidized insurance will induce some people to reduce the number of hours they work, but it will also mean higher productivity from Americans who are finally getting the health care they need, not to mention making better use of their skills because they can change jobs without the fear of losing coverage. Over all, health reform will probably make us richer as well as more secure.

Will the new view of inequality change our political debate? It should. Being nice to the wealthy and cruel to the poor is not, it turns out, the key to economic growth. On the contrary, making our economy fairer would also make it richer. Goodbye, trickle-down; hello, trickle-up.