This Way to Growth

To the editor:

Amity Shlaes’s “Growth, Not Equality” [Winter 2018] starts with several straw men that need to be addressed. There is no inherent conflict between greater economic equality and economic growth. In the initial postwar economy, we had high economic growth and low income and wealth inequality. Marginal tax rates during that time were 91 percent. Granted, the postwar period was an anomaly because of the destruction of the world economy by World War II, but the relationship between growth and economic equality is difficult to nail down, as each depends on many factors. Recent research tends to support the general notion that high income inequality retards growth and that greater equality can spur growth.

Economic theories, of the Right as well as the Left, may be of little value in understanding economic growth. Tax rates, interest rates, deficit financing, and monetary policy have marginal impact compared with the growth of our technological society over the last 150 years. It has been the impact of such inventions as the train, the lightbulb, the automobile, the airplane, medical advances, and, finally, the computer that has spurred growth. A free society is necessary for such inventions. But society may have reached the limits of growth with respect to innovation.

Sterling DeRamus

Birmingham, Alabama

Amity Shlaes responds:

Sterling DeRamus writes that “there is no inherent conflict between greater economic equality and economic growth.” That is correct, theoretically. But equality often doesn’t come naturally. The trouble comes when society undertakes policy to equalize. There is indeed an inherent conflict between policies designed to promote economic equality, on the one hand, and growth, on the other. That conflict exists because we live in a mobile world. A policy that imposes heavy taxes on top earners in the name of gaining revenue to educate the underprivileged, for example, drives top earners out of the tax base that would have funded that education. Hence the migration of New York’s top earners to Florida or Texas.

A heavy redistributionist hand, moreover, drives away producers and employers. The result is perverse. For nothing does more than a job to reduce the inequality between an employed and an unemployed worker. Truly wide disparities between incomes retard innovation, but dramatic, annihilating disparities tend to occur in commodity-based economies like Venezuela. This is the “resource curse.”

DeRamus likes the 1950s, when the top marginal tax rate on the federal income tax stood at 91 percent. He champions that decade as a period of strong growth and relatively little inequality. But he neglects to note the civic costs of the finagling, corruption, and market distortions that result from such a punitive regime. The only reason that such a tax rate was possible back then was that the U.S. confronted relatively little economic competition. For example, redistributionist unions—most notably, the United Auto Workers—forced automakers to pay ever higher wages from the 1950s onward. The wages were passed on to the consumer in the form of higher auto prices. Soon enough, Europe, Japan, South Korea, and others began producing cheaper cars. Thus did domestic redistributionists in this key sector (autos) kill the sector.

DeRamus maintains that “economic theories, of the Right as well as the Left, may be of little value in understanding economic growth.” Too true. But if growth is a mystery, that mystery warrants respect, rather than management—especially by ham-handed equalizers.

Donate

City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next