When is “good for the economy” not “good for the people”?

My answer on Quora:

Let’s begin with a narrow view, then zoom out.

With a very narrow view, I can think of an example or two, but they don’t amount to much. In the end, there is no durable example of something that is good for the economy but not good for the broad majority of people.

Ultimately, “the economy” is about how we – people – organize ourselves. It isn’t some “thing”, it is us!

First, let’s make sure we are on the same page. Some clarity is needed around what “good for the economy” entails, so let us say that “good for the economy” is anything that increases total output. Let us also say that “good for the people” is anything that increases employment, mobility, the size of the middle class, or variety of goods and services and/or decreases prices. We should also assume that “the people” refers to the broad majority.

If we narrowly focus on the short-term, then one ambiguous example of rising output but lower income or welfare for the general population includes labor-displacing technologies. On one hand, these productivity-enhancing technologies can raise total output (not a guarantee, but possible) but lower the labor share of income and increase income inequality (this has been happening for the last ten years, especially in advanced economies). On the other hand, “the people” now have more and cheaper goods and services at their disposal. This is why the impact of these technologies, in the short-term, can be ambiguous. However, the fear, concerns, and pace of new job creation lagging the pace of old job destruction, among other financial challenges, make this a net negative for people today (which is a preferred explanation to the rise of populism by many pundits).

This brings us to the more dynamic, general answer. In the end, there is nothing that is not good for the people but is good for the economy. The previous example, beyond a year or two, can backfire. The people can vote in politicians that may actually act against their interests (many examples here…), civil unrest can grow, and instability can threaten prosperity. Less subjectively, however, consumer demand will slow down and the incentives for businesses to invest will also slow (i.e. the world economy over the last few years, at least). This is partly why high income inequality is bad for the economy – not because of any personal or moral view on what is right or wrong, but because it threatens macroeconomic stability and creates a cycle of low demand, low investment, and high debt among the many who need to borrow from the few at the top to sustain their livelihoods (Note: this assumes that the existing system of taxes, redistribution, and ways of investing in human capital are held relatively constant. Economically, a society can theoretically organize itself to allocate resources efficiently, the challenges then become political, because the changes, in many cases, could be dramatic).

At the end of the day, “the economy” and the market is driven by us – people. It is for our own good — to make efficient use of the limited resources we have, to make us all better off without making others worse off (the ideal Pareto optimality), and to improve our well-being.

Some major questions confronting us now include how we actually measure the things that make us better off. Is it income, or well-being? That’s the next question that naturally follows from this one, but I’ll stop here and save that for it’s own time.

 

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