Noting that talented Bush-Cheney Alumni are working on many issues central to the work of the Bush Institute, the economic growth initiative is launching the Guest Writer Program in 2014, whereby a different alumnus will be asked to author an article for publication on our website each month. Our first guest writer is none other than Keith Hennessey, who, among other things, served as the Director of the National Economic Council under President Bush. His article, featured below, addresses the ongoing debate between economic growth and income distribution. More of his writing can be found at his blog: http://keithhennessey.com/.
The most common metaphor for debates about growth and income distribution is that of the economy as a pie. Some focus their policy efforts on economic growth and efficiency: making the pie bigger. Others emphasize policies that increase equity and redistribute income: how shall we cut up the pie and distribute its slices, whatever its total size?
We learn early in introductory economics that there is a big tradeoff between these two goals of equality and efficiency. Higher marginal tax rates allow for more income redistribution but create disincentives to work, save and invest and thereby reduce economic growth. Policymakers try to optimize, but at the end of the day someone has to decide whether faster economic growth or increased equity is the higher priority.
The pie metaphor for the economy is misleading and damaging, especially if you place a high priority on economic growth.
A pie has a predefined size. A central authority (probably the baker) cuts up the pie before serving any of it. It’s a single pie to be divided. Indeed the popular economic debate analyzes what “share of economic growth over the past X years has gone to the top (or bottom) Y percent,” as if income or income growth is a single quantity that is centrally allocated among a population, to be later reallocated by policymakers. Because the market allocation is increasingly unequal, some argue we can and should simply re-slice the new, bigger pie to produce more equitable pieces. Those who do usually ignore that their actions would make the economy smaller. The pie metaphor contributes to this view because one cuts the pie only after it has been baked, after its size has been centrally chosen.
The pie metaphor also mistakenly assumes that a single central decision-making authority decides the size of the pie. It assumes that the area of the pie (a circle) gets bigger consistently by the radius growing, so a central authority can easily slice up the new area. And because dividing a pie is zero-sum, the flawed metaphor assumes that if one person’s slice grows larger, it comes at the expense of others. The inapt metaphor and its accompanying flawed logic lead one to conclude that when rich people have a larger share of a bigger economy, they do so “at the expense of” others lower on the income scale. Using this metaphor, “the rich are capturing/taking a larger share of economic growth,” presumably from everyone else.
A flower garden is a better metaphor for looking at economic growth and income distribution. A flower’s growth depends on the individual characteristics of that type of flower and that particular seed. It also depends on common factors shared with other flowers in the same garden (e.g., the local climate, pests, the skill and diligence of the gardener) as well as its particular advantages relative to other flowers (better sunlight, soil, and water in this part of the garden than that part over there). Although there is some interdependence, the rapid growth of a sunflower at one end of the garden largely does not come at the expense of a struggling tulip at the other end. The sunflower may have advantages the tulip does not, even unfair ones, but the fast-growing sunflower is not “taking growth” from the slow-growing tulip.
Flowers will grow at different rates for a variety of different reasons. Policymakers should focus their energies on absolute growth rates rather than relative ones. It’s not a problem that some flowers are growing faster than normal, unless (a) that growth is indeed coming at the expense of other flowers, or (b) that more rapid growth is because the gardeners are neglecting the tulips to help the sunflowers grow faster.
In the same way it makes more sense to think of economic growth as the sum of the unequal income growths of tens of millions of separate individuals, rather than as a single growing pie to be divided. Any particular individual’s income growth depends on his innate talent, education, and skills, his effort and diligence, and some degree of luck. It also depends on common factors such as the health of the local, regional, national, and world economies, as well as shared resources like transportation and communications infrastructures and a stable and predictable system of law, property rights, and government rules.
The principal economic challenges are to maximize the growth potential of the entire economy/garden and to maximize the opportunities for those individuals/flowers struggling to succeed/grow. And just as a gardener should spend more time tending to the parts of his garden that are struggling, policymakers should devote greater effort to maximizing opportunities for those at the bottom of the income distribution to improve their lot. In the long run this means things like improving elementary and secondary education, expanding free trade, and reducing the growth burden of regulations, government spending, and debt. In the short run it means getting the incentives right so that those on means-tested government assistance don’t face exorbitant marginal effective tax rates from poorly designed income phase-outs.
The flower garden metaphor has one final advantage over the pie metaphor. A pie does not exist without a baker, whereas flowers grow naturally. The growth comes from the flowers, facilitated but not created by a good gardener. In the same way policymakers and elected officials neither “create jobs,” nor “increase economic growth.” Smart policymakers create the conditions under which private firms create jobs and in which millions of individuals combine their separate efforts to create economic growth. The origins of economic growth are in the private sector, not the public.
In an area of economic policy as complex as this, a good metaphor matters and can influence policy. Policymakers should create the conditions under which the whole economy can grow as rapidly as possible, and should devote particular effort to maximizing the potential for those most struggling to succeed. Let’s not fight about dividing up the pie, but instead work to help the whole flower garden, and all the flowers in it, to blossom.
Image by Mark Atwood.