A must-read

Amity Shlaes, who has carved out a niche for herself as a historian focusing on the impact of economics on the twists and turns of human events, has a piece worth your time at City Journal today. It's entitled "Growth, Not Equality."

She notes that a plurality of economists, even those that lean left (which is a preponderance of the field's practitioners today), acknowledge the importance of growth. The left-leaners, however, say that it's secondary to crafting policies that address inequality.

She gives a good explanation of the Gini coefficient and looks at its uses over the course of the 20th and early 21st centuries:

The redistributionist impulse has brought to the fore metrics such as the Gini coefficient, named after the ur-redistributor, Corrado Gini, an Italian social scientist who developed an early statistical measure of income distribution a century ago. A society where a single plutocrat earns all the income ranks a pure “1” on the Gini scale; one in which all earnings are perfectly equally distributed, the old Scandinavian ideal, scores a “0” by the Gini test. The Gini Index has been renamed or updated numerous times, but the principle remains the same. Income distribution and redistribution seem so crucial to progressives that French economist Thomas Piketty built an international bestseller around it, the wildly lauded Capital.

Through Gini’s lens, we now rank past eras. Decades in which policy endeavored or managed to even out and equalize earnings—the 1930s under Franklin Roosevelt, the 1960s under Lyndon Johnson—score high. Decades where policymakers focused on growth before equality, such as the 1920s, fare poorly. Decades about which social-justice advocates aren’t sure what to say—the 1970s, say—simply drop from the discussion. In the same hierarchy, federal debt moves down as a concern because austerity to reduce debt could hinder redistribution. Lately, advocates of economically progressive history have made taking any position other than theirs a dangerous practice. Academic culture longs to topple the idols of markets, just as it longs to topple statutes of Robert E. Lee.

She points out the glaring omission from that way of viewing economic activity: those animal spirits:

But progressives have their metrics wrong and their story backward. The geeky Gini metric fails to capture the American economic dynamic: in our country, innovative bursts lead to great wealth, which then moves to the rest of the population. Equality campaigns don’t lead automatically to prosperity; instead, prosperity leads to a higher standard of living and, eventually, in democracies, to greater equality. The late Simon Kuznets, who posited that societies that grow economically eventually become more equal, was right: growth cannot be assumed. Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight. Government debt matters as well. Those who ring the equality theme so loudly deprive their own constituents, whose goals are usually much more concrete: educational opportunity, homes, better electronics, and, most of all, jobs. Translated into policy, the equality impulse takes our future hostage. 

She compares the economic vitality of the US during the 1920s with the impact of the redistributive impulse of the 1930s and 1960s. The latter iteration led, of course, to the inflation rate and unemployment rate we saw rising in the 1970s.

It was only late in the 70s, when a number of people said, "We have to reintroduce some human ingenuity here," that a turnaround became possible.

Only when U.S. leaders turned to three areas that had been essential in the past—income taxes, the capital-gains tax, and patents—did a turnaround become possible. In 1978, Congress, led by Representative William Steiger of Wisconsin, cut the capital-gains rate in half, albeit with resistance from the redistributionist president, Jimmy Carter, who called the cut “a huge tax windfall for millionaires.” In some cases, the capital-gains rate was even lower—“Is a capital gains rate of 17.5 percent unfair?” asked the Washington Post. Yes, thought the paper’s editors. Nonetheless, the country saw the opportunity in lower rates and elected Ronald Reagan. Reagan followed up with a series of tax cuts that brought the top rate on the income tax down to a Coolidge-esque 28 percent. Less known, and also influential, was a law that Senators Birch Bayh and Robert Dole sponsored in 1980 to give scientists and inventors, or their universities, ownership of patents for their inventions. Bayh-Dole, as the patent law is known, caused patent applications to increase and venture capital to explode, powering the Silicon Valley expansion. As economist Larry Lindsey showed, the results of the 1920s repeated themselves. After the Reagan tax cuts, the government saw greater revenues than paper arithmetic had predicted.

She concludes by pointing up the dire need for some sound economics education in our secondary schools. Also more pro-growth activity in the economics field itself.