On May 4, Brookings did a symposium on the 40th anniversary of Arthur Okun's famous book Equality and Efficiency: The big tradeoff. There's some interesting stuff in the transcript and also in Brad DeLong's commentary, but I think the big story is that people on the liberal side of the divide are somewhat hesitant to go truly guns blazing after how fundamentally misguided the political economy thinking behind this tradeoff talk is.

Oligarchy isn't efficient

All societies have some inequality. At times, the people on the "winning" side of that inequality are able to influence the political process to further enrich the already rich. When people are in a position to do that, do they normally go about doing so by enacting "efficient" growth-friendly policies that maximize GDP?

Of course not.

Hedge fund managers get their income taxed at a preferential rate. Pharmaceutical companies hijack the global trade process to push for stronger patent rights. Medical doctors stifle competition from immigrants and nurse practitioners. Big companies seek rents, and when they do so successfully their shareholders and executives are duly rewarded.

Of course some very weak version of the tradeoff claim works. There are some policies that both increase growth and increase inequality. But there's no reason to believe that such policies are typical or that this is the big tradeoff that exists in practical political economy.

Dire poverty isn't efficient

Conversely, there's very little reason to think that a society with better living standards at the bottom will be less growth-friendly. Imagine if everyone in America managed to afford a house in a safe neighborhood that was close to a good school and that featured convenient commuting to job opportunities. That would be a much more egalitarian society. But it would also be much more growth-friendly, with more opportunities for workers, businesses, and customers to connect.

What if no kids suffered from lead poisoning or the developmental problems associated with the cortisone surged induced by poverty-relayed stress? What if every pregnant woman had great prenatal and neonatal health care?

Again. It is certainly possible to draw up ideas that would fight poverty at the expense of grohth. But there's no reason to think this trade off is typical of the universe of options.

Communism isn't egalitarian

Last but by no means least, it's worth saying that if you look at extreme cases of growth-stifling anti-market policies in the Soviet Union or North Korea that the actual outcomes are not at all egalitarian. The connected party elite just get to allocate all the best houses and jobs and stuff to themselves. It's oligarchy under the red flag, with a different set of songs and parades than the capitalist version.

But the real issue in all cases is not what ideology the state formally adheres to but who, in practice, is the policy process accountable to. If it's accountable to a narrow band of rich people that is worse than if it is accountable to the interests of average people. If it's accountable to an even narrower band of elite party members, that's even worse. But effective, accountable government is good for both equality and growth.

A real tradeoff: How much should we work?

What I think is particularly bothersome about this is that it ignores the very real tradeoff in welfare state design. How much do we want to encourage people to be working?

The less people work, the smaller our GDP will be. And yet every western country spends a lot of public money on retirement programs that pay people to not work. The tradeoff here is very real. If we spent that money on something else -- schools or roads or lead abatement -- that would clearly be good for growth. But people couldn't be as comfortable in retirement.

Similarly, almost all countries do some stuff to help out parents. But should that stuff be things like paid leave and childcare programs that help support parents to also be workers? Or should that stuff be things like Child Tax Credits and baby bonus payments that make it more economically feasible for parents to drop out of the workforce or reduce hours?

Different forms of this tradeoff -- do we want to encourage people to work, or do we want to facilitate non-work -- come up again and again and I think few political movements have a totally coherent approach to it.

Song of the day

Palomar, "Trade Off"