Lucas vs. Lucas: On Inequality and Growth

Juan Cordoba and Genevieve Verdier (gverdier@imf.org)

Macroeconomics from University Library of Munich, Germany

Abstract: Lucas (2004) asserts that 'Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion, the most poisonous, is to focus on questions of distribution...The potential for improving the lives of poor people by finding different ways of distributing current production is nothing [Italics in the original] compared to the apparently limitless potential of increasing production.' In this article we evaluate this claim using an extended version of Lucas' (1987) welfare evaluation framework. We construct a social welfare function following Lucas' (2004) own suggestion of weighing everyone's welfare equally, and compute welfare measures in the same way as Lucas (1987). The result is surprising and robust. The potential welfare gains of redistribution are substantial and likely exceed the welfare gains of economic growth. Moreover, our calculations suggest that US inequality is above its optimal level.

Keywords: Welfare costs; business cycles; economic growth; inequality (search for similar items in EconPapers)
JEL-codes: D3 E1 E2 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2005-11-18
New Economics Papers: this item is included in nep-dev, nep-dge, nep-hpe and nep-mac
Note: Type of Document - pdf; pages: 41
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Lucas vs. Lucas: On Inequality and Growth (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0511021

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