Equality Is Efficient

Crushing poverty in high-tax, egalitarian Denmark.

Wikipedia photo

Call me old-fashioned, but I have a problem with Charles Lane labeling Barack Obama’s take on inequality “simplistic” and then making an argument with a single datapoint of evidence:

It’s true that International Monetary Fund researchers Andrew Berg and Jonathan D. Ostry reported in September that egalitarian developing countries grow faster than less egalitarian ones. But the lesson for mature industrial economies is unclear. Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth. Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece.

Well okay, then. Here’s my three datapoint chart on the United States, Denmark, and Sweden:

Clearly we could argue like this for a while. But Lane’s larger point is a citation by authority to the late Arthur Okun who wrote a book entitled “Equality and Efficiency: The Big Tradeoff” which was published in 1975. It’s a bit of a strange citation, since Okun was writing in defense of the mixed economic that prevailed in the United States in the mid-1970s as against socialist and pure market alternatives. I think it’s pretty clear that American policy has evolved in a less egalitarian direction since that time, so it’s odd to cite Okun as evidence that Obama is unduly concerned with inequality. But a larger issue is that while Okun was a great economist, the language he uses to discuss this issue partakes of a questionable implicit moral theory. One sense in which a tax-and-transfer system might be efficient is that it might maximize the aggregate output of goods and services. Another sense in which a tax-and-transfer system might be efficient is that it might allocate goods and services so as to maximize human welfare. If we care more about human welfare (which we should) we’ll see that equality can be quite efficient.

Rich people, simply put, don’t get as much use out of their money as poor people do. This is particularly true because a lot of what rich people do with their money is bid up the price of scarce goods (beachfront property in the Hamptons, Park Avenue apartments) and compete with one another for status. Taking their money and giving it to people who need it more produces a much more efficient allocation of society’s material resources. That’s why Robert Frank and many of the rest of us think a steeply progressive consumption tax would be a big winner for America. Conversely, you could look at the case of Greg Mankiw who agrees with Lane that redistributive taxation is a bad idea. Mankiw, however, is too familiar with my argument about the inefficiency of inequality and instead argues on ethical grounds that redistributive taxation is morally wrong even though it can improve social welfare. This rather than old arguments about whether the United States should abandon the mixed economy in favor of socialism seems like the real question to grapple with.