Is there a tradeoff between growth and security?

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I’m back in the office on what is shaping up to be an extremely slow news day, which is why I find myself reading things like a little Q&A with economist Raghuram Rajan on the WSJ’s Real Time Economics blog. Here’s one of the Qs the resulting A:

How do you expect the U.S. model of capitalism to change as a result of the crisis? Can it regain its credibility?

Given the other models that we’ve tried in the past, this one seems to work pretty well. It’s sort of like democracy — the greatest good to the greatest number of people.

The question is how you get the benefits without the excess volatility that’s now in the system. I think that’s what we will tackle over the years. We are going to question whether we need a better safety net, we are going to question whether finance should be as risky as it has been.

We may well want to choose more safety and less risk, but we should go into it with open eyes. We can’t have the dynamism and at the same time expect a lot more security.

This sounds reasonable. There must be a tradeoff between dynamism and security, right? It just makes economic sense.

Except that, you know, the greatest run of economic growth this nation has ever experienced took place from the 1940s through the 1960s, a period during which the welfare state grew and grew. And the financial innovation and dynamism of the past few decades has brought only modest rewards for most American families (measured by median household incomes).

I’m not saying there’s no tradeoff at all. Just that it’s complicated, and that there are probably some methods of providing economic security (a well-run universal health care or pension system, say) that could lead to increased economic dynamism because they encourage people to make riskier job choices.