Afternoon Must-Read: Simon Wren-Lewis: Pareto, Inequality, and Government Debt

Simon Wren-Lewis: Pareto, Inequality and Government Debt: “The only possibly original point…

…is that the absurdity of restricting policies to Pareto improvements becomes immediately apparent if we think about government debt. Measures to reduce current… debt… almost certainly make current generations worse off…. Yet I do not often hear people arguing that we have to let debt stay high because the government can only implement Pareto improvements…. Textbooks still make a big deal of dynamic inefficiency…. Government intervention to discouraging saving would be a Pareto improvement: the current generation consumes more because they save less… future generations consume more because less output needs to go to replacement investment. The symmetrical case is where there is too little capital…. Yet the implication… is that this case is not one we should worry about, because to change it (by raising saving) would make the current generation worse off and is therefore not a Pareto improvement…. We don’t think this way about government debt, so why should we when it comes to productive capital?

Why is there this emphasis on only looking at Pareto improvements? I think you would have to work quite hard to argue that it was intrinsic to economic theory…. Many economists use social welfare functions…. One thing that is intrinsic to economic theory is the diminishing marginal utility of consumption. Couple that with the idea of representative agents… and you have a natural bias towards equality. Focusing just on Pareto improvements neutralises that possibility. Now I mention this not to imply that the emphasis put on Pareto improvements in textbooks and elsewhere is a right wing plot–I do not know enough to argue that…