Wednesday, November 19, 2014

If this was a prize fight...

Thomas Piketty's corner should throw in the towel. Following on the heels of Deirdre McCloskey's devastation of Inequalityland, come this from David Dollar, Tatjana Kleineberg and Aart Kraay;
For all of the social welfare functions we consider, social welfare, on average, increases equiproportionately with increases in average incomes. This reflects the fact that changes in the relevant inequality measures are not systematically correlated with changes in average incomes. For all but the most bottom-sensitive social welfare functions, the relationship between growth in social welfare and growth in average incomes is also very tight, in the sense that data points cluster closely to the 45-degree line [in an accompanying graph]. This reflects the fact that changes in inequality are small, meaning that variation across episodes in inequality accounts for only a small fraction of the variation across episodes in changes in social welfare. And this, in turn, implies that the additional growth in average incomes required to ‘compensate’ – in terms of social welfare growth – for a typical increase in inequality is, on average, quite small.
Their conclusion;
The main policy message of our work is to underscore the importance of overall economic growth for improvements in social welfare. Inequality may be a ‘hot’ current topic, but inequality changes in most countries over the past thirty years have been small, while differences in average growth performance have been large. 
Which means that Elizabeth Warren would be a disaster if she ever got any real power (not that Hillary Clinton would be much less destructive).
 With growing pressure to ‘do something’ about inequality, it is important that policymakers are careful to avoid undermining growth in the quest for greater equality, as policies that raise equality at the expense of lower growth may be self-defeating in the sense of not improving social welfare. 
Cutting off one's nose....

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