Why Grow The Pie?

Noah Smith has another of his centrist triangulation pieces at Bloomberg:

But it isn't too late. As growth slows, and China becomes a more powerful and aggressive rival, maybe Americans will give up their destructive focus on fighting over the pie, and start thinking about how to make the pie bigger. An important step in that process is for libertarians and conservatives to recognize that good government is an crucial ingredient of national wealth.

By good government, it's clear he means public investments in infrastructure and research. And that's fine as far as that goes. I am not going to argue against the claim that says better infrastructure is good.

But there are severe problems with the idea that it is destructive to "focus on fighting over the pie." After all, what is meant to be the value of a bigger pie? Surely it is that people get more stuff. But a bigger pie doesn't actually mean everyone gets more stuff. Only a specific widespread distribution of the increase in the pie does that. And, if you've paid any attention to the market distribution trends over the last half-century, you know that only non-market distributive institutions are able to ensure that specific distribution results.

So "fighting over the pie"—which means fighting over how to construct our distributive institutions—is the only way that a bigger pie gets funneled into something that's useful to the non-rich. Adding a bunch of income at the top of society without adding it anywhere else (or even subtracting it elsewhere) grows the pie, but who cares about that? Not me.

As a general matter, this pie analogy is perhaps the most deceptive one in all of popular economics writing. The way it is used always assumes that the gains to growth are distributed proportionally. The suggestion of the metaphor is that if the economy grows 3%, then everyone's slice grows 3% and everyone maintains their relative distributive position. But that's not what happens. Instead, the rich increase their market income by far more than 3% and the rest increase their income by much less, if they increase it at all. Consequently, the rich gobble up ever-greater percentages of the pie.

Externalities and Growth

In addition to the pie stuff, Smith's piece also unreflectively perpetuates the notion that distributive concerns are unrelated to matters of growth and externalities. But nobody can seriously maintain that's the case.

For instance, the economic cost of child poverty has been estimated to be around $550 billion per year. This figure is derived by estimating the loss of future earnings, worse health, and higher crime that is associated with the human wreckage left by depriving children. Another study found that a $3,000 increase in family income for children below the poverty line is associated with 17% higher earnings as adults. Altering the distribution so as to cut our highest-in-the-developed-world child poverty rates would have massive positive externalities that "grow the pie." But, on Smith's simplistic taxonomy, it would be classified as a destructive fight over mere distribution and "subsidies to the poor."

It's not just child poverty. Just as a general matter, greater "redistribution" tends to increase growth, so says the IMF. Distribution and production are intertwined and popular economist writers should stop pretending otherwise. It's not level-headed centrism to hive the two off from one another. It's ideological. If you don't believe me, don't eat for the next few days and then see how much work you get done.