Equality Is Efficient

A blog about business and economics.
Dec. 20 2011 3:45 PM

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.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Michigan’s Tradition of Football “Toughness” Needs to Go—Starting With Coach Hoke

Does Your Child Have “Sluggish Cognitive Tempo”? Or Is That Just a Disorder Made Up to Scare You?

The First Case of Ebola in America Has Been Diagnosed in Dallas

Windows 8 Was So Bad That Microsoft Will Skip Straight to Windows 10


Mad About Modi

Why the controversial Indian prime minister drew 19,000 cheering fans to Madison Square Garden.

Building a Better Workplace

You Deserve a Pre-cation

The smartest job perk you’ve never heard of.

Don’t Panic! The U.S. Already Stops Ebola and Similar Diseases From Spreading. Here’s How.

Parents, Get Your Teenage Daughters the IUD

The XX Factor
Sept. 30 2014 12:34 PM Parents, Get Your Teenage Daughters the IUD
  News & Politics
Sept. 30 2014 6:59 PM The Democrats’ War at Home Can the president’s party defend itself from the president’s foreign policy blunders?
Sept. 30 2014 7:02 PM At Long Last, eBay Sets PayPal Free
Sept. 30 2014 7:35 PM Who Owns Scrabble’s Word List? Hasbro says the list of playable words belongs to the company. Players beg to differ.
  Double X
The XX Factor
Sept. 30 2014 12:34 PM Parents, Get Your Teenage Daughters the IUD
  Slate Plus
Behind the Scenes
Sept. 30 2014 3:21 PM Meet Jordan Weissmann Five questions with Slate’s senior business and economics correspondent.
Brow Beat
Sept. 30 2014 8:54 PM Bette Davis Talks Gender Roles in a Delightful, Animated Interview From 1963
Future Tense
Sept. 30 2014 7:00 PM There’s Going to Be a Live-Action Tetris Movie for Some Reason
  Health & Science
Medical Examiner
Sept. 30 2014 6:44 PM Ebola Was Already Here How the United States contains deadly hemorrhagic fevers.
Sports Nut
Sept. 30 2014 5:54 PM Goodbye, Tough Guy It’s time for Michigan to fire its toughness-obsessed coach, Brady Hoke.