Real World Milo Wrong edition Is Okun Right Must we tolerate inequality to maintain efficiency 13 12 43 Arthur Okun argues that equality reduces efficiency Empirically there is little support for Okun s argument Inequality reduces efficiency by fostering distrust Equality can be efficient by promoting investments in human capital 13 12 43 Is it fair that some have more than others YES They deserve it as a reward to hard and unpleasant work We should give rewards to encourage people to work hard Maybe our view depends on how much inequality is reward to work and how much is luck or due to political manipulation NO Productivity comes from many sources including society People are not rich because they work hard More a matter of luck and manipulation of markets Rewards are not needed to get people to be productive Rewards can encourage counterproductive behavior Americans want a more equal distribution of income 92 prefer Equalden to USA http www theatlantic com business archive 2012 08 americans want to live in amuch more equal country they just dont realize it 260639 If we are an egalitarian democracy Why do we tolerate these disparities Okun we accept inequality to achieve more efficiency We can reduce market inequality only in a leaky bucket He is at least partly wrong Loss of work incentives the rich don t work because of taxes the poor stop working because they can collect welfare Bureaucracy unproductive government officials to collect taxes and supervise welfare Loss of incentives to be creative and take big risks to earn big rewards 13 12 43 Americans were not the first to favor income redistribution We make movies about it 13 12 43 Society Okun says has a production possibility frontier of efficiency and equality More of one will lead to less of the other More equality comes at the cost of less efficiency We buy more efficiency by giving the rich more and reducing equality Okun Even the poor will benefit from inequality Greater income produced by incentives will trickle down to the poor 13 12 43 How much leakage would you accept If we took 100 from the richest person to give to the poor how much loss would you accept 1 95 2 50 3 20 4 5 13 12 43 Okun s logic If we reduce the penalty for poverty we encourage the poor to stay poor rather than working hard and productively in the market If we reduce the rewards for being rich we reduce the incentive to work hard and productively Also redistribution creates a wasteful bureaucracy 13 12 43 Okun poverty is a spur to productivity and opulence is a reward The lazy sleep on the street Hard work is rewarded with golden ice cream sundaes 13 12 43 We design social policy to minimize the costs of equality We do little for those who should earn on their own We do more to help the elderly and the disabled because we don t expect them to work 13 12 43 But Okun is wrong There is no association between inequality and greater efficiency Not across countries Nor across US states 13 12 43 We don t need inequality to get growth Productivity Growth and Change in 1 share 1977 2010 Annual labor producitivity growth 1977 2010 3 0 2 5 Costs to inequality Higher productivity growth iwith slower growth in 1 share 2 0 f x 0x 0 02 R 0 11 1 5 1 0 0 5 0 0 0 0 2 0 4 0 6 0 Growth in 1 share 1977 2010 8 0 10 0 12 0 Worldwide increasing inequality Gini lowers growth while redistribution increases it http www demos org blog 2 27 14 imf reducinginequalitytransfersincreases growth US has had very high marginal tax rates 13 12 43 http paul kedrosky com archives 2011 07 top u s marginal tax rates over time html Without slowing income growth 2 6 Lower tax rates associated with slower per capita income growth 2 4 Percapita income growth rate 2 2 f x 0x 0 02 R 0 3 2 0 1 8 1 6 1 4 1 2 1 0 92 13 12 43 70 50 38 Highest Marginal Tax Rate 34 30 Okun is wrong much inequality is due to luck not talent or work A third of the Forbes 400 were born into the super rich Almost all of the rest were born rich Virtually all of great fortunes come from owning an asset that appreciates in value more than the rest of the market anticipated Real estate Commodities Equity in a company Why is Okun wrong trust Communities with wide inequality have more crime and higher transactions costs to police and guard possessions They suffer inefficiency of crime insecurity and lawyers 13 12 43 Okun is wrong Inequality is expensive We pay with crime and distrust Trust is a great economic asset It allows us to avoid expensive litigation and crime Cooperation trumps conflict The United States has the least equal distribution of income and the highest incarceration rate Inequality raises rewards for theft and the penalty for poverty 13 12 44 Places with inequality put more people in jail There are costs to inequality more differential means more to defend http economix blogs nytimes com 200 9 03 12 crime and punishment somecosts of inequality more 2233 13 12 44 Costs to Inequality Violence is greater in societies with less equality Why participate in the market if you can do better by engaging in theft or fraud 13 12 44 Prisons are expensive So are lawyers Especially these 13 12 44 It costs money to catch criminals It helps if advertisers pay for it 13 12 43 Some may not be worth it 13 12 44 Crime is expensive So are burgler alarms 13 12 44 And strange defenses 13 12 44 We all benefit from living in a society where others are healthy trust worthy honest and well educated It is convenient not to need body guards 13 12 44 Economic growth depends on cooperation The problem of economic growth is to tap the ideas of large numbers of people No one is smart enough to do it by him or herself Capitalism is good at this compared with slavery or feudalism But cooperation requires trust and commitment to others it is undermined by individualism 13 12 44 This team built the Lunar Lander LEM This team brought a World Championship to Boston They worked together and trusted each other 13 12 44 Even the best educated and most talented benefit from equality that gives them educated people with whom to work These are some of the people who built the Atom Bomb They were a team of trained scientists Many regretted what they did 13 12 43 On Thanksgiving we celebrate people working together Only by cooperating could the English settlers live through that first winter They needed the help of the native peoples Who would have cause to regret helping the Europeans 13 12 44 Why Okun is wrong Human capital If we leave