Growth Dividend Politics

The following bit of text from a Washington Post piece reminded me of a concept I have been wanting to talk about for some time:

Heather Boushey, a liberal economist who has discussed policy informally with Clinton, and who runs the Washington Center for Equitable Growth think tank, argues that it is not politically wise to play down the need for economic growth.

“If you don’t grow, then you really have to just take from someone and give it to somebody else. That’s a tough place to start,” she said. “You’re setting yourself up for some tough conversations that go not just against politics, but also human nature.”

As an initial matter, it is of course untrue that reducing income inequality without growth requires taking from someone to give to somebody else. Reducing income inequality is all about changing the way the future flow of national income is distributed. The income of the future has not yet been distributed to anybody. Thus, if we reorient our economic institutions so that the national income of 2016 is distributed more evenly than it would be distributed under status quo institutions, that involves absolutely no taking from anyone. And this is true even if the total amount of national income in 2016 is unchanged from the total amount of national income in 2015, i.e. there is no growth.

With that said, Boushey is on to something here. A true zero-based national income budgeting approach (where each year we decide affirmatively how to distribute all of that year's income from scratch) can be a bit troubling and destabilizing insofar as it opens up the possibility of individuals suffering major downward personal income swings. These swings already happen for some people (e.g. if you lose your job and are unemployed for a significant amount of time), but in a typical year, most people receive at least the same personal income as they did in the previous year. If you want to reduce income inequality without cutting individuals' incomes below their incomes in the prior year, then you must grow the national income while also ensuring that the extra income resulting from growth is primarily distributed to the bottom and middle.

Back in the Ken Galbraith days, there seemed to have been a quasi-popular way of talking about this sort of egalitarian strategy, at least among some circles. The amount of extra income produced by an economy relative to the prior year was called the "Growth Dividend." So, if 2015's national income is $14 trillion and 2016's national income is $14.2 trillion, then the growth dividend in 2016 is $200 billion. That is the amount of new income that is available to distribute out. The state could theoretically ratchet up taxes in 2016 in such a way that captures all or most of the $200 billion of the Growth Dividend while not cutting anybody's personal income back from 2015. If the state directs the Growth Dividend to welfare benefits for the lower and middle class, then that would cause inequality to fall without reducing anyone's income.

To embrace the Growth Dividend frame, each year we should be estimating how much extra income we'll have in the economy (e.g. adjusted net national income) and deciding what exactly we should do with it. Should it flow out as market income under our current set of rules? Should it flow out as market income under a different set of rules (e.g. stonger unions, higher minimum wages, and higher top taxes)? Should it be used to build out maternity leave, child care benefits, and free college?