Growing concensus that we now need active government

In A shift in political thinking is giving Labor a sense of purpose Lenore Taylor argues that there's a new wave of thinking in economics and politics stating the old open model is now reducing growth because of rising inequality.

Australian thinkers, and political parties, have been grappling with a growing wave of thought that the economic challenges of the 2010s cannot be solved by the old 1980s political consensus – the consensus that said economic growth is best achieved by market deregulation and lower taxes and lower spending that generate growth, and allow “all boats to rise” by providing the revenue for governments to pay for social programs and do something or other about poverty.

The rethinking has been going on for quite a while internationally, from Thomas Piketty through to the major international economic institutions. And it turns the old consensus on its head – arguing that rising inequality harms growth, that smart social spending is not the kindly thing governments do after they raise the revenue, but rather a first order revenue-boosting exercise in itself, and asserting that governments need to intervene more to get their economies through this economic transition.

The IMF now says income distribution matters for growth. “Specifically, if the income share of the top 20% (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20% (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth,” an IMF discussion paper said.