Wednesday, May 06, 2015

A False Dilemma: Economic Efficiency vs. Equality

"Equality and efficiency are often thought to be in a zero-sum relationship: the more we have of one, the less we have of the other (18). Many policy issues therefore take the form of debating what is the best 'mix' of equality and efficiency, or how much of what we currently have in one dimension we should give up in order to obtain more in the other dimension. Tax and welfare policy are two areas where the belief in a trade-off is strongest. Since there are good reasons to think the relationship between equality and efficiency is not zero-sum, it is worth summarizing the 'logic' of the trade-off view.There are three 'reasons' why efficiency and equality are thought to be in a trade-off. The first and foremost is the motivation argument. It holds that equality eliminates the differential rewards necessary to motivate people to be productive. Any move toward equalization of incomes - such as through welfare grants, progressive taxation, or restructuring of wages - 'will' reduce individual effort, personal savings and eventually, the level of productive investment a society can generate. The motivation argument goes back at least as far as Reverend Malthus's eighteenth-century treatise on poverty, in which he postulated that the stimulus of providing for oneself and bettering one's condition in life is necessary to 'overcome the natural indolence of mankind' . Thus, greater equality through income redistribution to the poor would necessarily lead to less work and lower production.(19)
The second 'reason' for the trade-off is that to maintain equality, government must continually interfere with individual choices about how to use resources, and in doing so, it curbs useful experimentation and productive innovation. One element of this innovation argument is that the more we have a policy of equality, the larger the government bureauocracy has to be. and the larger the bureaucracy, the more inflexible it is likely to be. In large organizations, innovators tend to be suppressed (20).

The third 'reason' is the waste argument. To maintain equality 'requires' a large administrative machinery that uses up resources but is not itself productive. The admnistrative machinery of equality - tax bureaus, welfare agencies, labor departments and the judicial apparatus for resolving conflicts generated by these entities - represent an 'actual' loss of valued resources. The labor, buildings, computer and paper thus used could go to producing other things. Arther Okun dramatized this argument with his metaphor of a leaky bucket: any redistributive policy is like carrying money from rich to poor in a leaky bucket. The policy question for Okun is how much waste one will tolerate before deciding it is not worth engaging in transfer at all.
The motivation argument is familiar from the great debate about equity. If you do not accept need as the primary motivator, if you believe people work also for the inherent satisfaction of the sense of belonging, then you will probably not be terribly convinced by the argument here. But the most important critique of of the motivation theory comes from another corner. Even if people are motivated by need and by the desire to increase differences of status and wealth between themselves and others, such enormous differences as we currently have are not necessary to sustain motivation. We could move in the direction of more equality without sacrificing efficiency. ... Some redistribution ... obviously does not halt experimentation and innovation. If it did, tax and welfare systems would have long ago killed the American economy, not to mention the West European and Japanese economies. Of course, we can always wonder what marvelous innovations might have happened had the last tax dollar not been extracted, but then, we can also wonder what marvelous innovation might have happened had the next tax dollar gone to finance education or basic research.
Neither is it clear that administrative machinery is wasteful. In the first place, to call something 'administrative' rather than 'productive' is to win the argument by sheer rhetoric. But more importantly, administrative machinery employs people, integrates them in a social group, and gives them dignity, if it accomplishes nothing else. In a society that stakes personal worth on paid employment but cannot provide employment for everyone, that is no small contribution. And finally, the administrative machinery necessary for equity is arguably no less productive, no less useful to soceity than some of the innovations spawned by the pursuit of profit – hula hoops and pet rocks, fruit loops and fruity pebbles, gold fingernails and green hair. Hula hoops may indeed contribute to both individual and social welfare, if only because they, too, provide jobs, but one would be hard put to say that they contribute more than a government agency.
The mos telling evidence against an immutable equality/efficiency trade-off comes from cross-national studies. Japan has very high taxes on capital, steeply progressive taxes on personal income, fairly high inheritance taxes and very low taxes on consumption(such as sales taxes). Yet it has one of the highest rates of personal savings in the world, is a leader in technological innovation, and leads the industrial countries in productivity growth. West Germany has high corporate taxes, a generous pension system, a comprehensive universal health insurance system, and a far more equal distribution of income than does the United States.
As Robert Kuttner has shown, there are many different ways of reconciling equality with economic performance. There are many ways a society can go about providing economic security, collecting taxes, maintaining full employment, stimulating investment, promoting economic development and distributing income. These are political choices. Where Labor is well-organized and shares significant political power, where in other words there is someone to “articulate the self-interest of the nonrich” economic policies tend to reconcile equality with efficiency. The idea that the two are incompatible is a politically useful myth for the rich and powerful(22).

_Policy Paradox and Political Reason_ , Deborah Stone, Harper-Collins 1988.

[In Sum: ‘Economic Equality or Efficiency' is a false dilemma, often justified in three ways:
1) Needed to 'overcome the natural indolence of mankind'(Malthus) False
2) ‘Needs intrusive gov’t., which stifles innovation.’ False
3)  ‘Needs big gov’t., which is wasteful’ False]

18: The idea of a trade-off between these two policy goals was popularized by Arthur Okun's Godkin Lectures, published under the title _Equality and Efficiency: the Big Tradeoff_ (Wash. D.C.: Brookings Inst. 1975)

19  T. R. Malthus, _An Essay on the Principle of Population_, Anthony Flew, Ed. (Harmondsworth: Penguin, 1970 :245

20  This is one of Okun's arguements, and it seems to be the one that most convinces him of a zero-sum relationship. See Okun op. cit. (note 18):56-60

21 Lester Thurow, _The Zero-Sum Society_(NY, Basic Books, 1980):201-202

22 Robert Kuttner, _The Economic Illusion: False Choices between Prosperty and Justice_ (Boston: Houghton Mifflin, 1984):267

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