Robert Solow is a Nobel Laureate in economics whose research was on growth theory. He is at the new Center For Equitable Growth in Washington and is given an opportunity in this video interview to tell us why an unequal society is not good for growth, as well as what it might take to become a more equitable society. He believes that the challenge within economics today is to better understand how we can move towards a society that has the goal of growth with greater equity. The 28 minute interview gives him an opportunity tell his story.
We currently have a low growth economy that is increasingly inequitable. That creates supply side as well as demand side problems that will limit future growth. On the supply side, we are eroding our supply of human capital that is essential for growth and innovation. The long term unemployed become unemployable and we lose their economic output. Secondly, those in poverty are unable to develop their capabilities, so we are limiting our pool of innovative talent that is essential for growth. A shrinking middle class also reduces aggregate demand since they have less income to spend. The higher share of income going to those at the top does not create the same level of demand because much of it is funneled into the purchase of financial assets.
One of the barriers to an equitable growth society is the belief that growth is dependent upon a laissez faire economic system that provides powerful financial incentives that reward innovation. Solow argues that we over estimate the power of financial incentives to encourage innovation. Most entrepreneurs are driven by non-financial incentives as well as by financial rewards. There is a reason why someone with $39 million will work hard to get to $40 million and it has little to do with money. We have made the tax system less progressive under the guise that it was necessary to encourage innovation. According the Solow, there is little evidence to support that myth. (We have not been more innovative under a less progressive tax system that we were under a much more progressive tax system that prevailed prior to the 1980's.) Solow argues that economists should be doing more research to learn more about the incentives that encourage innovation.