At some point everyone who got an advanced degree in the policy sciences in the last 30 years had to read Arthur Okun’s Equality & Efficiency: the Big Trade Off. It was a little book with a big influence. The central image in the book was the “leaky bucket” (proving, I guess, that he was an economist and not a literary stylist). From Okun’s perspective, any attempt to improve income equality automatically led to economic inefficiency. As government tried to “carry” wealth from one group of people to another, the bucket leaked and some economic capacity was lost in the effort to improve equality. That has been accepted as Gospel truth by policy wonks of all persuasions. Until now. New York Times economics columnist (& winner of the Nobel prize for economics) Paul Krugman says that two new studies suggest that, contrary to Okun’s theory, the reality is that efforts to improve income equality may actually help economic efficiency.
Here’s what Krugman has to say:
So does reducing inequality through redistribution hurt economic growth? Not according to two landmark studies by economists at the International Monetary Fund, which is hardly a leftist organization. The first study looked at the historical relationship between inequality and growth, and found that nations with relatively low income inequality do better at achieving sustained economic growth as opposed to occasional “spurts.” The second, released last month, looked directly at the effect of income redistribution, and found that “redistribution appears generally benign in terms of its impact on growth.”
In short, if these studies are correct, Okun’s big theoretical trade-off doesn’t seem to be a trade-off at all.
Krugman’s full column is here.