Why a Fair Economy Is Not Incompatible with Growth but Essential to It

One of the most pernicious falsehoods you’ll hear during the next seven months of political campaigning is there’s a necessary tradeoff between fairness and economic growth. By this view, if we raise taxes on the wealthy the economy can’t grow as fast.

Wrong. Taxes were far higher on top incomes in the three decades after World War II than they’ve been since. And the distribution of income was far more equal. Yet the American economy grew faster in those years than it’s grown since tax rates on the top were slashed in 1981.

This wasn’t a post-war aberration. Bill Clinton raised taxes on the wealthy in the 1990s, and the economy produced faster job growth and higher wages than it did after George W. Bush slashed taxes on the rich in his first term.

If you need more evidence, consider modern Germany, where taxes on the wealthy are much higher than they are here and the distribution of income is far more equal. But Germany’s average annual growth has been faster than that in the United States.

You see, higher taxes on the wealthy can finance more investments in infrastructure, education, and health care – which are vital to a productive workforce and to the economic prospects of the middle class.

Higher taxes on the wealthy also allow for lower taxes on the middle – potentially restoring enough middle-class purchasing power to keep the economy growing. As we’ve seen in recent years, when disposable income is concentrated at the top, the middle class doesn’t have enough money to boost the economy.

Finally, concentrated wealth can lead to speculative bubbles as the rich in the same limited class of assets – whether gold, dotcoms, or real estate. And when these bubbles pop the entire economy suffers.

What we should have learned over the last half century is that growth doesn’t trickle down from the top. It percolates upward from working people who are adequately educated, healthy, sufficiently rewarded, and who feel they have a fair chance to make it in America.

Fairness isn’t incompatible with growth. It’s necessary for it.

This post originally appeared at Robert Reich’s Blog and is posted with permission.

4 Responses to "Why a Fair Economy Is Not Incompatible with Growth but Essential to It"

  1. R. Coutinho   April 16, 2012 at 9:06 am

    Although I agree with the author's premise (fairness being necessary for growth), his citing of times when taxes were higher, yet there was growth, does not necessarily have a cause and effect relationship.

  2. DINESH DESAI   April 17, 2012 at 1:14 am

    WHAT IS LACKING FROM THE TAX DEBATE IS WHAT A GOVERNMENT DOES WITH COLLECTED TAX REVENUE. IT CAN USE IT FOR CONSUMPTION OR INVESTMENT, IT CAN USE IT TO STIMULATE DEMAND OR SUPPLY, OR IT CAN USE IT TO PAY DOWN THE NATIONAL DEBT OR BUILD A RAINY DAY FUND. A GOOD USE WOULD BE TO BUILD A COUNTER CYCLICAL FUND TO DEAL WITH FLUCTUATIONS OF BUSINESS CYCLES. THERE ARE JUST AS MANY WAYS OF USING TAX REVENUE AS THERE ARE WAYS OF COLLECTING TAXES.

  3. M. Klein   April 17, 2012 at 9:39 pm

    Another factor contributing to a strong economy in the post-WWII years was the strength of unions, which demanded higher salaries for workers from greater productivity. The economy grew on the purchasing power of a large middle class. Many veterans also got a college degree or started a business with the GI Bill. Both these benefits flowed from FDR's New Deal. Since the Reagan years, federal policy is to weaken unions, and we see the sad results: a weakened middle class, combined with more concentrated economic and political power going to the very wealthy.

  4. benleet   April 26, 2012 at 5:03 pm

    The top 10% of households never received more than 35% annual income-share between 1942 to 1982, and in 2007 they received 49.5%, according to U.C. Berkeley professor E. Saez, "Striking It Richer". Inequality of distribution of income, and wealth, can wreck an economy. "Just as in a poker game, when the losers run out of credit, the game is over" — Marriner Eccles, former head of the FED, describing the cause of the Great Depression.