Income Distribution, Welfare, and Economic Growth: Evidence Towards Social Investment in American States

Efficiency and equity are key values in democratic societies. The relationship betweeneconomic growth and redistribution has been theorized and empirically tested in manystudies (Burtless 2003; Ashby and Sobel 2007; Frank 2009). However, scholars provideconflicting theoretical expectations and empirical evidence suggested is inconsistent. Theimpact of economic growth on income distribution does not seem to be unidirectional.Doucouliagos \u26 Ulubasoglu (2008) argue that the relationship is contingent upon social,cultural, and demographic institutions. Inconsistent empirical evidence seems to be alignedwith the differences in social, cultural, and demographic institutions across nations.Accepting Doucouliagos \u26 Ulubasoglu (2008)’s argument, this study seeks to find the linkamong income distribution, welfare, and economic growth using the case of the U.S. States.The United States have experienced economic growth and higher income inequality over acouple of decades. Does this indicate that efficiency sacrifices equity (Okun 1975)? Fewstudies have been conducted to disentangle the relationship and clarify underlyingmechanisms. This study finds a positive impact of the welfare state on income distributionand also finds that an equal income distribution leads to higher economic growth rates. Itsupports the social investment theory; an investment on productive welfare programspromotes economic development (Midgley 1999)