Countering the right-wing arguments about investment

Most right-wing economic policy arguments are really bad. The idea, for instance, that regulatory burdens and uncertainty are responsible for the bad economy — instead of the housing crisis, financial crisis, and debt overhang — is on its face absurd. But if you dig past the talking points far enough, you can actually find some sophistication.

The most sophisticated argument the right-wing has to offer is one based upon investment and capital accumulation. According to the argument — which generally relies upon the Solow Growth Model — investment drives capital accumulation, which drives economic growth, which makes the the lower and middle classes better off. Because the rich have a lower marginal propensity to consume than the non-rich, redistributing money from the rich to the non-rich will decrease overall savings and investment, which will decrease economic growth, and hurt everyone including the poor and middle classes.

Put more simply, the argument is this: for any given dollar, rich people are more likely to save and invest it than the non-rich because rich people already have their consumption desires met. Thus, taking dollars from rich people and giving them to non-rich people will result in more of the dollars going towards consumption instead of investment. That will decrease growth, which will hurt the very people receiving the cash transfers in the long-term. Thus, it is bad policy to redistribute money from the rich to the non-rich.

In no particular order, here are some problems with the position:

1. Growth does not necessarily help the non-rich
The core theory of the argument is that redistribution will reduce growth in the long term. It is assumed that growth benefits everyone, and that therefore reducing it hurts everyone. While that is a convenient assumption, it does not reflect the reality of economic growth in the United States for the past 4 decades. In that time, the benefits of productivity growth have almost entirely flowed to the rich, not the middle class, and certainly not the poor. If growth almost entirely benefits the rich, hurting growth through redistribution almost entirely hurts the rich, not those receiving the transfers.

2. Transfers can improve human capital and thereby encourage growth
More than 1 in 5 children in the US live in poverty. We know that growing up in poverty makes it difficult for children to learn. In a modern economy especially, education is probably the most important factor of human capital, i.e. those attributes which make workers productive. By reducing childhood poverty with transfers, we can improve the overall stock of human capital. That will make the next generation of workers more productive, which will increase overall growth. This is just one example of transfers improving human capital: consider also the benefits of improved health, reduced stress, and so on. It is quite possible then that the investment in human capital inherent in a cash transfer delivers greater returns than the sorts of investments a rich person might make with the same money.

3. The argument fails under certain macroeconomic conditions
For the macroeconomy to function properly and therefore grow or avoid contraction, you need investment and consumption. Whether increasing consumption at the expense of investment is a problem really just depends on the macroeconomic conditions. If we are systematically underinvesting, then transfers that have the effect of reducing investment further will reduce long-term growth. But if we are not systematically underinvesting — or if we have too little aggregate demand — transfers that increase consumption at the expense of investment are no problem, and may actually increase long-term growth (by avoiding hysteresis for instance).

4. Reducing long-term growth to improve short-term welfare is reasonable
All the argument actually says is that redistribution causes long-term growth to be lower than it would otherwise be. But that long-term growth hit may be worth it. We can reasonably believe that ensuring social equality and a welfare floor are worth the long-term reduction in growth.

5. Transfers do not have to reduce investment
The right-wing argument contemplates a certain kind of transfer: dollars are taxed from the rich and then given to the non-rich, who then can do what they want with them. If we want to make sure those dollars go to investment and not consumption, we can structure the transfers a different way. For example, we could put the transfers in an investment account that cannot be liquidated for a certain number of years. It would resemble the individual retirement accounts conservatives want to replace Social Security with. Alternatively, the money could be placed into a general fund that the government would invest directly, out of which dividends would be paid to transfer recipients.

So the argument ultimately falls apart on a number of levels. It assumes growth benefits everyone when it doesn’t. It ignores the growth-damaging human capital costs of high inequality and poverty. And most importantly, it ignores the fact that we can carry out transfer programs in a way that ensures the transferred money is invested. The money can be taxed away and invested by or for the recipients of the transfers. At the very best then, the right-wing point about investment and growth is one about appropriate transfer policy construction, not one about the merits of transfers themselves.