Equality and Efficiency: The Big Tradeoff

That is the title of a book written by economist Arthur Okun in 1975. There was a recent WSJ article about him.

See Fighting Inequality With a Minimum of ‘Leaks’: The Great Society economist Arthur Okun argued that government policies are ‘leaky buckets’ that can never be perfectly efficient, involving trade-offs between costs and benefit by Roger Lowenstein. 

The end of the article hints at the difference between positive and normative economics which I discuss briefly. Excerpts:

"Policies intended to fix inequality often have costly side effects, minuses as well pluses."

"“Equality and Efficiency: The Big Tradeoff,” published in 1975. Written by a former presidential adviser named Arthur Okun, it remains a staple of economics seminars. Okun argued that efficiency and equality typically exist at opposite ends of a seesaw. Push one up and the other tends to suffer. There is a trade-off."

"Okun illustrated his thesis with a memorable metaphor. Social policies were like buckets—but they were leaky buckets. For every dollar expended, policies to aid the poor might deliver only 80 or 90 cents. Buckets with the biggest leaks could squander most of the benefits. The leak could result from poorly designed incentives or from inefficiency. Okun’s point was that policy makers should devise programs that get the best of this trade-off—those with the smallest leaks."

"He served on the Council of Economic Advisers under President Lyndon B. Johnson"

"Today, Okun’s framework remains a powerful analytical tool. Consider, for instance, the massive stimulus spending during the pandemic. Progressives insisted that serious inflation was not a risk, but they were wrong. Over the past 12 months, thanks to hefty government checks, among other causes, inflation consumed all of workers’ wage gains—and more. The policy was a very leaky bucket.

Student debt forbearance is another one. Not only are college and graduate students disproportionately well off, but the money has already been borrowed, so canceling loans would do nothing for incentives. It would be far more efficient to lend money to students in community colleges and condition aid upon graduation.

President Donald Trump’s tariffs were pitched as a job protection policy, but studies suggest that for each job saved in U.S. factories making washing machines or steel, American consumers were saddled with more than $800,000 in higher prices: an inefficient bucket. On balance, it’s not clear that tariffs help inequality at all."

"the debate over inequality suffers from a basic ambiguity: inequality between whom? Though trade hurts certain groups of American workers, trade liberalization has helped to lift two billion people in Asia out of poverty. Many critiques of inequality focus on the top 1%, but some say the rich are a distraction: What matters is elevating the poor." 

"a policy to, say, tax the superrich will not necessarily create good jobs at the bottom.

In assessing economic progress, inequality alone is an incomplete measure. After all, inequality falls during recessions; it also fell during the pandemic. But pandemics and recessions are plainly bad for everyone. Growth also matters."

"economists across the political spectrum endorse policies that they deem less leaky: investments in education, worker retraining, child care and housing; inducements to work rather than subsidies for the out-of-work; ending job discrimination; attracting high-skilled immigrants."

"When life prospects are so unequal, one policy response is to invest more in common goods, such as infrastructure, public transport and healthcare. This is the approach in Europe, which is less unequal than the U.S. but has, on average, a lower standard of living. There is a trade-off.

Once you start looking at the world through the lens of trade-offs, policy debates become less about right and wrong and more matters of give and take. Covid lockdowns aren’t good or bad—they reduce the risk of illness but impose an economic and social cost. A gas tax holiday offers relief at the pump but encourages people to burn more oil.

At the very least, debates over trade-offs tend to be rooted in facts. Arguments over good and evil can resemble theological schisms."

The last sentence is what touches on the difference between positive and normative economics. A positive statement is just a statement of fact, like the unemployment rate is 5.1%. A normative statement makes a value judgement like "the unemployment rate is too high" of "the government needs to do something to lower the unemployment rate."

Related post:

Okun's Law (for every two percentage points the economy grows above its long-term trend annually, unemployment falls by a percentage point)