A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Wednesday, June 24, 2009

Equality as Economically Efficient

From the podcast


One of the tenets of Demand Side we have not made explicit recently is the proposition that more equal distribution of income is more efficient and stable and leads to a more robust economy. You may remember that one of the similarities between the crash of '29 and the crash of '08 was the historically large disparity between the rich and the rest of us.

This is, of course, an anathema to the supply side, whose notion is that giving more to one class will encourage them to produce more -- that class being the investing and entrepreneurial class, that is, the rich.

In fact, in a market economy, more equal income means more equal access to incentives. It also means a better economy. We'll get to Brad DeLong and the history note on this point in just a moment.

But one of the more intersting studies I can remember was one which surveyed self-reported happiness levels across different cultures. it turns out that it is not the absolute level of income that matters at all in self-reported well-being, but the relative wealth. If your hut has a bamboo mat on the floor and your neighbors have only dirt, you may report the same level of happiness as someone who has a Lexus in his garage when his neighbors have only Toyotas parked on the street.

Another, much more recent, study, demonstrated that excessive rewards may actually retard performance, as people stress too much and over think. We believe you see very poor moral performance when the stakes are high.

All of which leads us into today's history note and its author Brad DeLong. I found this in DeLong's U.S. Economic History lectures at Berkeley on iTunes.


Brad DeLong is professor of Economic History and chair of the Department of Political Economy at Berkeley. In the latter occupation he has been quite distracted since the Obama Administration shanghaied his department's Christina Romer and he lost David Romer in the transaction.

Why stop here? Some innovative researcher should examine the postwar United States. When economic equality was greatest -- in the 1950s and 1960's -- so too was prosperity and growth.

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