Politicians Should Resist Equality and Prosperity!

Alberto Alesina and Paola Giuliano give us what strikes me as the most boneheaded argument I’ve read in a very long time (hat tip Mark Thoma):

The thirty years after the Second World War were the period of the “Great Compression” – a sharp reduction in income inequality (Piketty and Saez 2003). A few months ago, just before the crisis, we were back to roughly to the level of the 1920s, which was the norm in previous decades, not to mention the level of inequality and of social immobility of pre-capitalist societies. But the perception that this increase in inequality was unfair will greatly weigh on the way it will be handled and the political backlash it will create.

What they seem to be saying:

• The Great Compression [which, btw, coincided with The Great Prosperity] was a historical anomaly.

• The inequality of the 1920s, the 2000s, and the feudal period is the typical [hence natural? hence proper?] state of things.

• We should strive to achieve and maintain that feudal state.

See what I mean?

Looking at this as a technical problem rather than a morality play, two comments:

1. In prosperous countries, greater income equality has a small positive correlation with faster growth and greater prosperity. Greater wealth equality has a very strong correlation with faster growth and greater prosperity.

This is especially true over the long term–which is what matters, and what actually means something statistically.

Correlation between wealth equality (Luxembourg Wealth Study) and growth in GDP per capita over 35 years is .67. It’s damned rare to see a correlation that profound in the social sciences.

2. Combining local, state, and federal taxes, U.S. taxation is in fact not progressive–like, at all.

Given those facts, it’s not at all clear why “Politicians should resist such populist measures.”