Today’s big U.S. economic trade-off isn’t equality or efficiency
This year marks the 40th anniversary of the publication of the late economist Arthur Okun’s book, “Equality and Efficiency: The Big Trade-Off.” Rereading Okun in 2015, however, feels about as relevant to my work as an economist as does reading Hilary Mantel’s “Wolf Hall,” about 16th century Britain. Both are interesting and enjoyable swings through the historical past–and I highly recommend them–but neither should be used as a roadmap for today’s policymakers.
Okun’s purpose in 1975 was to give political leaders guidelines for how to think about economic policy based on his understanding gleaned over the previous 40 or so years. In his view, policymakers face a trade-off between addressing economic inequality and promoting economic efficiency, which is to say, addressing inequality threatens the foundation for a competitive economy. He uses the idiom “we can’t have our cake and eat it too” to frame his fundamental concern, saying, “We can’t have our cake of market efficiency and share it equally.”
This question led him to steer social scientists toward a narrow focus on the whether and how of the “big trade-off.” He ends his book with this plea: “I do, however, hope to persuade others to share my views about the preconditions for optimization—a more focused public dialogue on the intensities of preferences for equality and a greater research effort by social scientists on the measurement of the leakages. In short, I am pleading for us all to face up to the tradeoff between equality and efficiency.”
Today’s policymakers might pick up Okun’s book as a roadmap for coping with today’s rising inequality. After all, his concern was when and how policymakers should tax the rich to give to the poor. As Okun put it then: “Because the bottom end of the income scale is at the top of my priority list, I shall concentrate largely on the tax-transfer options.” I would argue that this is not today’s question. Focusing on technocratic solutions for helping those at the bottom of the income ladder diverts our attention from what’s really going on in our economy and society today.
“The Big Trade-Off” examines a United States where “the relative distribution of family income has changed very little in the past generation,” and where Okun could argue that the most pressing question was how much equality was enough. Problem is, in the 40 years since Okun’s book was published, the gains of U.S. economic growth have not been shared as widely as they were in the post-war era that Okun examined. While our economy has grown and productivity has improved—that is, American workers produce more goods and services per hour worked—wages and incomes have failed to keep pace. The middle class has seen little growth and the bottom has seen no growth, while incomes at the top have exploded.
According to data from economists Emmanuel Saez at the University of California-Berkeley and Thomas Piketty at the Paris School of Economics, between 1976 and 2007 the bottom 90 percent saw their income grow by an annual rate of ¼ of 1 percent, adjusted for inflation, while the top 1 percent saw theirs grow by 4.4 percent. Put another way—and pulling forward to the most recent year of data—from 1975 to 2013, the top 10 percent of households have accrued 109 percent of all the income gained.
This wasn’t Okun’s economy. Between 1933 and 1975, the top 10 percent took home only 29 percent of the income gains. Certainly, that’s more than their equal share, but the bottom 90 percent did get 70 percent of the growth and saw their incomes rise at a pace of 3.9 percent per year.[i] Okun pondered a trade-off between equality and efficiency just when those at the top of the wealth and income ladder began hauling off all the gains of economic growth.
Our political discourse today is also strikingly different than in Okun’s time. In the era he lived in, there was broad agreement about the role of policy. It’s a world unrecognizable to those of us steeped in the severe partisanship of the Bush and Obama years. Okun could blithely write, “I do not know anyone today who would disagree, in principle, that every person, regardless of merit or ability to pay, should receive medical care and food in the face of serious illness or malnutrition” That is not America today, where lawmakers in Congress and in statehouses around the country push to cut spending on the Supplemental Nutrition Assistance Program and seek to limit the availability of Medicaid made available recently under the Affordable Care Act.
Okun was—as we all are—a product of his time. Specific economic and political realities led him to conclusions that are inapplicable to today’s economy. He argues that our society accepts more inequality in economic assets than sociopolitical assets. He boldly begins his book by saying, “American society proclaims the worth of every human being. All citizens are guaranteed equal justice and equal political rights.” That’s an audacious statement to make 40 years ago and remains so today.
I live on U Street, in Washington, DC, and over the past week protestors have marched through my neighborhood loudly proclaiming, “All lives matter. Black lives matter.” They are marching because citizen-documentarians across the nation have shown the sad truth of police brutality. To point to just one statistic: The unemployment rate for African Americans has held steady at twice the rate of whites for decades. This was true in 1975 and it’s true today.
It’s hard to reconcile today’s political reality with Okun’s bold beginning in “The Big Tradeoff.” Fundamentally, it comes down to whether the lack of economic inclusion for African Americans directly affects their political and social power. If we cannot separate economic and political rights as neatly as Okun does, there’s no other conclusion than that today’s policymakers should be wary—very wary—of taking this book as a roadmap.
Okun’s analysis leads him to dismiss the notion that those at the top can buy political and social power. In his view, we don’t need to worry about the power of those with money because the state has ample strictures in place to keep the “Howard Hughes’s”—who in his day was one of the richest men in the world—from controlling the political process. Of course, he was writing immediately after Watergate and a sense of optimism that campaign finance reform would be effective clearly shaped his thinking. He concluded that such regulation was far better than tax policy for curbing the power of the rich: “If the uses of fat checkbook in the political process can be tightly regulated, the plutocracy will lose much of its political punch.”
We cannot be so sanguine today. Thomas Piketty’s book “Capital in the 21st Century” soared to the top of the best-seller list no doubt because we are a nation looking for answers to what’s happened to our economy and our political system. U.S. economists haven’t been asking those questions or providing those answers in no small part to Okun’s dismissal of the notion that we need to focus on incomes (and power) at the top.
Indeed, Okun missed what would become the biggest question of our times. When Okun was writing, the typical CEO earned about 25 times the typical worker. How could he know that today, they earn nearly 300 times the typical worker? [ii] Given the era he lived in—long before the Supreme Court’s 2010 ruling in Citizens United v. Federal Election Commission that enabled unlimited campaign contributions by multimillionaires and billionaires—perhaps his conclusion was reasonable. Yet Okun’s thinking still dominates economic and political discourse. While policymakers argue whether government aid for the less fortunate in our society is more or less efficient for our economy, the big economic trend of the long-term of a growing gap in productivity and wages and the top income earners pulling further and further away from the rest are not thoroughly examined for their consequences on future U.S. economic growth. It’s taken the work of Piketty—and his many co-authors—to focus us on these larger questions. Piketty’s conclusion is that we need to take swift action, but so long as we remain trapped in Okun’s trade-off, we’re not having the right conversation.
Because Okun began from a premise that assumed that his status-quo economy would continue for the foreseeable future, he focused us on the wrong questions. He asked us to focus on society’s preferences for equality, rather than society’s preferences for a strong middle class. He asked researchers to focus on measuring the “leaky budget”—his term for what is lost to an economy when government tries to ease economic inequality—a technocratic focus that has not served us well. He dismissed the big questions and left us with technocratic debates over how much we should give the poor, rather than how strong and vital our middle class should be.
But, my critique goes deeper. It’s hard not to see Okun’s legacy as the problem rather than the solution. His view that we needn’t focus our energies thinking about the effects of rising top incomes and that the real problem was ensuring that we didn’t veer too far into ensuring equality steered us in the wrong direction. Had we not listened, would we be here today.
[i] Data are computations from the updated Excel files provided by Thomas Piketty and Emmanuel Saez, based on this research: Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913–1998,” The Quarterly Journal of Economics 118, no. 1 (February 2003): 1–39.
[ii] “CEO Pay Continues to Rise as Typical Workers Are Paid Less,” Economic Policy Institute, accessed May 3, 2015, http://www.epi.org/publication/ceo-pay-continues-to-rise/.