EA - Inequality is a problem for EA and economic growth by karthik-t

Link to original articleWelcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: Inequality is a problem for EA and economic growth, published by karthik-t on August 8, 2022 on The Effective Altruism Forum. Recently, EAs have considered economic growth as a potential way to improve overall wellbeing and also help the worst-off people. The recently-influential Progress Studies movement focuses on economic growth as the most important way to improve people's lives. In an essay that won the EA Forum Decade Review, Hauke Hillebrandt and John Halstead argued that we should focus on promoting economic growth in developing countries as a better alternative to targeting the extreme poor with health programs or cash transfers. In contrast, last month, Open Philanthropy published a report on the social returns to productivity growth, concluding that the cost-effectiveness of R&D spending is only 45X (45% as good as cash transfers to the poor, 4.5% of the bar for OP funding). This essay quantifies a common objection to economic growth as the best way to improve wellbeing: the objection that growth is unequally distributed. Inequality has been shockingly neglected by EAs, to the point that I literally had to create the inequality tag for posting this essay. This is probably because EAs care about maximizing welfare, not about reducing inequality: but I argue that inequality reduces the welfare gains from economic growth, so inequality is your problem too. To quantify this argument, I build on Open Philanthropy's framework for modelling the cost-effectiveness of growth. I extend this framework to account for inequality in two ways: I use an empirically grounded (isoelastic) utility function, rather than the more commonly used (logarithmic) utility function that overvalues consumption growth for well-off people. This change reduces the social value of economic growth by 90%. I use data on inequality of income growth, and show that adjusting for this inequality reduces the social value of economic growth by 36%, independently of the above change. In short, inequality is a serious problem for people who support promoting growth as a cost-effective way to improve the world. Thinking about inequality should make us favor more conventional global health and development interventions, which target the extreme poor Why inequality matters, even to utilitarians Inequality is usually framed as a concern for egalitarian-minded people. But if you want to maximize utility, you also have to care about inequality, because of the simple fact of diminishing marginal utility. Inequality means that more income is accruing to people who don't derive as much utility from that income. Consider a toy example: There is an economy with two agents, Alice and Bob. Alice and Bob each have the logarithmic utility function u(c)=ln(c). The social utility function is the sum of their utilities, U(c)=ln(cA)+ln(cB). Note that this social utility function is completely neutral to inequality: it does not place any inherent weight on Alice and Bob having similar incomes, or penalize deviations from that. Initial GDP is $100, split unevenly: Alice has an income of $80 and Bob has an income of $20. Now consider two scenarios of economic growth: Scenario 1: GDP grows by 10% ($10). Alice and Bob split this surplus evenly, so Alice gets $5 and Bob gets $5. The change in social welfare is ΔU=[ln(85)+ln(25)]−[ln(80)+ln(20)] ⟹ΔU=ln(85/80)+ln(25/20)≈0.28 so utility increases by 0.28 log units. Scenario 2: GDP grows by 10% ($10). Alice and Bob split this surplus unevenly, but proportional to their income, so that Alice gets $7 and Bob gets $3. The change in social welfare would be ΔU=ln(88/80)+ln(22/20)≈0.19 so utility increases by 0.19 log units, which is a smaller increase than in scenario 1. What's going on here? Even though aggregate income growth is the same in both scenarios, in the second, Alice get...