Thursday, July 2, 2020

The Necessity of Economic Growth: Why Growth Beats Global Redistribution

Some countries are rich and others poor. Some people are rich and others poor. Many philosophers and politicians conclude poverty is thus a misallocation problem, too much here and too little there. Consider this thought experiment:


           Misallocated Pie

Great Grandma baked a pie, enough to give all 206 of her great-grandchildren a full slice. But thanks to her bad eyesight, she gave 20 great-children giant slices, 60 of them medium slices, and the rest tiny slices, so little that they’ll go hungry. 


Misallocated Pie elicits egalitarian intuitions: The lucky should redistribute some of their big slices to the unlucky kids. Once everyone gets an equal portion, everyone will have enough. 

Philosophers often employ variations of Misallocated Pie to argue that richer countries should redistribute their wealth to poorer countries. They also use it to argue that the richer people inside single countries should redistribute their wealth and income to poorer people. 

Simple arithmetic reveals that reallocating the existing world income cannot eliminate world poverty. In Misallocated Pie, when everyone gets an equal slice, everyone gets enough. In the real world, allocating equal slices means no one gets enough. We cannot end world poverty without significant widespread economic growth. 

In 2019, purchasing price parity-adjust world product was about $128 trillion USD. That’s the total value of all goods, services, capital investment, capital development, NGO activity, government activity, and so on, produced in one year, adjusted by differences in costs of living.

Imagine, unrealistically, that I can wave a magic wand converting all production into consumable income. Imagine the magic wand split world income equally all living people. Imagine there is no loss of production.

PPP-adjusted per-capita world product is about $16,100. That’s just slightly higher than the American poverty line (for one adult living alone). It’s about half of what socialist Bernie Sanders considers a proper annual living wage. It’s approximately the same per-capita income as Issaquena County, Mississippi, the poorest county in the contiguous United States that is not majority Native-American. By comparison, the relatively poor Appalachian region of the United States has a per-capita PPP-adjusted mean income of about $39,000. 

Thus, waving the magic wand doesn’t end poverty. Rather, equalizing income means everyone is poor. Granted, more than half the world is below the mean income, so my wand makes them richer. Nevertheless, perfectly executed global redistribution means no one would meet standard of living sufficient to lead a properly secure and autonomous life.

It gets worse. The magic wand thought experiment overstates the case for global redistribution and understates the case for growth. I asked you to imagine all current production is converted to income and distributed equally. In reality, most production could not, even in principle, be converted to income and transferred or redistributed to workers. GDP includes various kinds of capital investment, government spending, infrastructure development, and other kinds of output which cannot be made liquid and transferred. 

It gets worse. By hypothesis, the magic wand converts all economic output into consumable income. By hypothesis, governments, universities, non-profits, and for-profit corporations produce nothing and cannot exist. The thought experiment asks you to imagine we maintain current world per-capita income without any capital investment or reinvestment, without spending any money on capital goods, without investing in new energy sources, without investing in infrastructure and transportation, and so on. It’s nonsense. This means even perfectly egalitarian redistribution could not ensure everyone receives $16,100/year.

It gets worse. We’re also imagining that when the magic wand is waved, people continue to work at the same rate and with the same productivity. We’re imagining white collar workers who used to work 70 hours a week for high salaries keep working for their guaranteed tiny salaries of $16,100. We’re imagining teenagers at McDonald’s put in their 20 hours per work rather than using their $16,100 to party. We’re imagining that there is no disincentive to work, even though everyone gets $16,100 a year no matter what. Real people aren’t like that. I, for one, would quit, and so would you. If we had to keep working to get that $16,100, we’d both work less productively. 

The upshot is that if you care about ending poverty, growth takes priority over equality. While there may be some justifiable role for redistribution, redistribution remains secondary. Political philosophers often talk as if there is and always will be enough stuff for everybody, as if the only issue is how allocate that stuff. Not so.