Monday, March 2, 2009

More questions on equality, growth and the stimulus

Here's a recent editorial by E.J. Dionne of the Washington Post,

and a column by Caroline Baum from Bloomberg that hits a similar topic.

There are a lot of questions here, but two are directly related to current class topics:

1. Will increasing equality via redistribution (as opposed to or in combination with "bail-out" cash) help get us out of the economic mess we're in in the short-run?

2. What will be the long-run implications for growth?

Dionne does not really address these directly, and basically starts with the (in)equality argument. Baum doesn't focus on the equality argument, but essentially proposes that now isn't the time to fix equality or other matters like the environment. She also questions the efficacy of the TARP funds and bail-outs in general, noting that trying to smooth things out in the short-run could have disastrous long-term consequences.

Based on what we've learned in the past two months, could policy aimed at redistribution (or other matters related to 'development' instead of 'growth') in the immediate term help or hurt the situation? Would policy favoring investment by the wealthy have a more pronounced effect given that those with higher incomes seem to have their money "on the sidelines" right now?

1 comment:

  1. In response to question 1, I don't believe that wealth redistribution will help our economic situation in the short run. Given the general drain on the economy from transfer payments, higher taxes and implementation of new welfare systems in the short run, this kind of policy would likely just slow the recovery. In the long run, however, income equality could bode well for growth. So long as the income equality comes with other types equality (I'm mainly thinking of educational), future growth should increase with greater equality as we have shown using economic theory in class.

    Regarding the criticism of the mismanagement of TARP funds in the article, I think the blame needs to be placed less with banks and more with the government. The money was not given to the banks, it was given to the bank holding companies. With threats of bank nationalization and the possibility of bankrupcy, there is no incentive for the holding companies to pass that money on to the banks to make more loans. Yet the government is directly blaming bank presidents for not loaning the money that they never received. If Congress/the Treasury wants the money to be used to give loans, then the money should be given directly to the banks rather than the holding companies. Why would the holding companies continue to invest in highly risky assets (with little hope of good returns) when they can put the money to assist their other assets in these rough economic times?