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From Economic Analysis to Inclusive Growth

Developed-economy policymakers are seeking a recipe for inclusive economic growth, whereby high rates of investment and rapid innovation are pursued alongside measures to reduce income inequality. The Scandinavian model is often invoked in support of this approach, but could it really work in a country like the US?

WASHINGTON, DC – Most economies are seeking a recipe for inclusive economic growth, whereby high rates of investment, rapid innovation, and strong GDP gains are pursued alongside measures to reduce income inequality. Conservatives insist that growth requires low taxes and incentives such as flexible labor markets to encourage entrepreneurship. But reducing inequality requires higher levels of government spending and taxation (except when government is pursuing deficit spending to stimulate a depressed economy).

The Scandinavian economic model is often invoked to bridge this gap. The Danish “flexicurity” system, in particular, has historically delivered solid economic performance alongside low inequality. Leading economists such as Philippe Aghion have published excellent analyses of how this model could balance growth, equality, and overall satisfaction of citizens elsewhere in the world.

These economists argue that labor markets with few restrictions on hiring and firing, low taxes on entrepreneurship, and generous incentives for innovation are compatible with a relatively equal income distribution, high social spending by government, and equalizing social policies such as universal free education.

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