Is All Economic Growth Created Equal?
The 20 percent button: a thought experiment.
Imagine a button that would instantly double the productivity of the labor market’s most productive quintile, but also cause the least productive quintile to drop out of the labor force. Would you push the button?
The top quintile is more productive to begin with, so the gain from doubling its productivity exceeds the loss at the bottom—the tradeoff leaves our economy more productive and output higher. If you want, for purposes of the hypothetical, you can stipulate that pushing the button also implements whatever policy of redistribution you might prefer, taxing away some share of the top’s gains and transferring it to those no longer working. In consumption terms, everyone can be a “winner.”
This “20 Percent Button” offers a useful heuristic for the fissures emerging within our traditional political coalitions. I posed the question recently to a group of business school students who thought they shared a political outlook. Simultaneously, some said “yes, of course” while others said “of course not.” And then they gasped audibly, amazed that people with whom they were accustomed to agreeing could see such an easy and obvious matter so differently.
Posing the question on Twitter, I discovered first and foremost that people really don’t want to answer it. Of those who had given a firm response when this went to press, 85 percent said no. But the most common reaction was to “fight the hypothetical” and explain why it was not plausible, dissemble that the answer might depend, or simply endorse the question as interesting without offering an opinion. While this methodology is wildly unscientific in so many ways, one obvious interpretation is that people unwilling to push the button are happy to say so, while something causes prospective pushers to hesitate.
That’s striking, because pushing the button is the easier answer, the one consistent with mainstream economics built to optimize consumer welfare, and the choice implied by our approach to public policy. The widely embraced concept of “the economic pie” presumes that our primary goal should be growing the economy and that those left behind can be compensated by the winners so that everyone ends up ahead. When the government conducts cost-benefit analyses of regulations, it treats the potential effect on workers as irrelevant; a cost-benefit analysis of pushing the button would find only benefits. When economists dismiss the negative labor-market effects of massive trade deficits by emphasizing that consumers benefit from cheaper goods, they are employing a framework that endorses button-pushing unreservedly.
Yet obviously, something in this exercise gives us pause. While our economic model treats all expansions of the pie as equally good, staring at the button forces us to consider that perhaps not all growth is created equal; that whose growth matters. This is not an argument about inequality—if pushing the button doubled the productivity of some while leaving others unaffected, most people might slam it without a second thought. But note that, in consumption terms, the button does just that. With the right taxes and transfers, the bottom 20 percent can buy more in the year 1 A.B. (After Button) than in the year prior.
Our hesitation stems, rather, from an intuition that consumption is the wrong measure. We like consumption. We want living standards to rise. But such lenses come with blinders. At any moment in time, we worry rightly that those who have moved from productive work to reliance on government programs have lost something important. And over time, we wonder what maladies we might be introducing into the families and communities experiencing that shift and what it will mean for opportunity in the next generation.
Differing views on the button are fundamental to the argument raging within the right-of-center, with battle lines drawn roughly between libertarians who would gladly push the button and conservatives who would not. The left-of-center will find itself grappling with the same questions, especially as the 2020 presidential primaries begin, and will likely discover comparable divides. On that side of the political spectrum, the split will emerge between the progressives intrigued by ideas like a “universal basic income” and the traditional liberals aligned more closely with labor.
Yes, yes, the hypothetical is completely unrealistic. No such button exists. Productivity quintiles are not clean cut. Productivity does not magically double without other things changing. All that misses the point, which is to test our commitment to the consumer-welfare model that has dominated our political economy for 50fifty years. Anything less than a lunge toward the button impliedly acknowledges that the model must be incomplete. True, upon return to the real world, no such black-and-white choices present themselves. But equally true, the black-and-white question of which policy is most “pro-growth” can no longer be sufficient.
We face many choices about how to structure our economy and society and whether to foster a healthy labor market in situations when doing otherwise might appear the quicker path to growth. Beholden to a consumer-welfare obsession, we have repeatedly evaluated these choices as button-pushers: we have regulated in pursuit of an ever cleaner environment without regard for the industrial economy, built a college-or-bust education system that yields a lot of college graduates and a lot of busts, glibly celebrated massive trade deficits and ignored our own immigration laws, and constructed a massive safety net that actively discourages work. If we’d at least stare hard at the button, much else requires a closer look too.