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Is Inequality Necessary?

My friend Charles Lane, former editor of the New Republic and now a Washington Post editorialist, didn't like President Obama's speech about income inequality ("Obama's Simplistic View of Income Inequality"). What Obama fails to grasp, Lane writes, is that there's a trade-off between economic growth and economic redistribution. He cites in support of this point the late Yale economist Arthur Okun's book Equality and Efficiency: The Big Tradeoff, published in 1975, in which Okun argues that at some point economic redistribution undermines economic growth. That is true in the same sense that it's true that at some theoretical point marginal taxes rise so high that they inhibit economic growth. The argument, in both instances, is over where that point is. Liberals think the threshold is very high. Conservatives think it's very low. At the time Okun wrote his book, income inequality had either fallen or remained constant for more than 40 years. Yet from the end of World War II until the Arab oil embargo of 1973, the U.S. economy had boomed far more than it has ever since. Obviously, then, economic growth and diminishing income inequality are not in inherent conflict. Quite possibly the one encourages the other (until, that is, you reach that theoretical threshold where economic return no longer justifies effort).

Lane believes the opposite, citing the social democracies of western Europe as an example. "Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth," Lane writes. Since there is no country in western Europe where income distribution and/or economic growth is or ever has been "flat," I assume Lane means "flatter." If that's what he means, he's just wrong, as the U.S. economy demonstrated between the early 1930s and the late 1970s, and as western Europe demonstrates today.

"Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece," Lane writes. His source, I assume, is a table on page 45 of this newly-released OECD paper. Actually, the biggest decrease in income inequality was in Turkey. We can argue about whether Turkey is or isn't part of Europe, but not about the specious nature of Lane's argument. Between 1985 and about 2005 France recorded Europe's biggest decrease in inequality, according to an earlier OECD study (see table on page 27). Yet France enjoyed healthy economic growth and is not currently at risk of default. Lane's argument is also hard to square with the fact that (measured by the Gini index) Greece as of 2008 had more income inequality than Germany, economic powerhouse of the European Union. Indeed, the countries now at risk of default (Greece, Italy, Spain, Portugal) are, if anything, notable for their abnormally high Gini-measured levels of income inequality (Ireland is an exception). And seriously pinko (yet economically healthy) Sweden has a level of income inequality well below all these countries.

A lot of people on the right have been arguing lately that socialism destroyed the Eurozone. Maybe there is evidence to support this view, but I haven't seen it yet.