John Cochrane on inequality and growth

Though he is quite polemic, too polemic I would say, he is largely correct:

Oh please. Yes, the problem with America is… our darn national thriftiness?

Anyway, can’t we do better than spewing some half-remembered undergraduate course from the mid 1970s in which a sleepy professor with long hair and bell bottoms pushed around IS LM curves and talked about “demand” and “marginal propensity to consume” a lot? Didn’t Milton Friedman demolish the whole concept of “marginal propensity to consume” 70 years ago? Is this it for the connection between inequality and growth?

Most of all, if the reason that inequality is bad for growth is that it leads to insufficient consumption and lack of demand, then that can easily be addressed in the same Keynesian framework with lots of stimulus spending. If you play the game, it seems to me you have to play by the rules. Even if you accept the diagnosis, then you do not accept the conclusion that very high — and very distorting — taxes and transfers are the best remedy. Unless… you really don’t believe the mechanism, or the connection to growth, and this is all rhetoric in favor of taxation for other reasons. It is interesting how the diagnoses seem to follow the prescription.

There is more here, polemic throughout, on the recent S&P study, which doesn’t seem to hold up.


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