Economics

Economists Pretend They Don't Pick Winners and Losers

The dismal science usually ignores who is helped or hurt by policies. That should stop.

Think.

Photographer: Joel Saget/AFP/getty images

Economics has always had to grapple with questions of moral philosophy. Unlike most natural sciences, econ deals directly with issues of government and social policy. Should we raise the minimum wage? Should we have universal health care? Is it OK to take money away from the rich and give it to the poor? The answers to these questions rely not just on facts and numbers, but on moral judgments and on your point of view.

For example, suppose the U.S. government is considering opening up trade with a large, poor country. The move would make most consumers a little better off -- they would have cheaper clothes and toys. But a few workers in the textile and toy-manufacturing industries would be devastated -- their careers would be down the drain, all their knowledge suddenly rendered obsolete. If they couldn’t retrain for new careers -- and let’s face it, how many 45-year-olds can retrain for new careers? -- they’d be stuck in low-wage, low-prestige service jobs, or dependent on government handouts.

Should economists recommend this policy, reasoning that the good of the many outweighs the good of the few? Or should they be opposed to hurting a few people a lot so the majority can reap a modest benefit?

For decades, economists have tried to sweep these hard questions under the rug. Uncomfortable with telling leaders and voters what’s right and wrong, they have focused on the objective, or positive side of their discipline -- finding the facts as best they can, and leaving hard moral (normative) decisions to the democratic process.

In some ways, that was an admirable impulse. But it’s getting harder and harder to maintain that just-the-facts attitude, because society seems to be facing increasingly tough choices about who should receive the fruits of prosperity. As productivity growth slows and inequality becomes more severe, questions about how the economic pie should be divided have come to dominate our national discourse.

A new paper from economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman provides a huge flood of numbers illustrating how pressing the issue of inequality has become. Drawing on a wide array of data sources, they create highly accurate numbers on the distribution of national income. They call these “distributional national accounts,” to juxtapose them with the traditional national income and product accounts like gross domestic product, investment and consumption.

The implication is that we should think about inequality as an economic target every bit as important as total output. Piketty et al. want to give us a language with which to talk about inequality as a central feature of the economy, instead of having to mention it as a caveat at the end of every policy discussion. By preventing distributional concerns from disappearing down the memory hole, the authors hope to nudge economists and policy makers alike toward more aggressive actions to reduce economic inequality.

The story told by the new numbers is much the same as the one we’ve been hearing about for years now. Since the 1970s, the U.S. economy has become much more unequal. Here’s a picture of the income share of the top 1 percent, before and after government redistribution:

High but Leveling Off

U.S. national ncome share of the top 1 percent

Source: Gary Zucman, University of California-Berkeley

The good news: The rise in inequality may be over. The vast majority of the increase came between 1980 and 2005; since then, the disparities have stabilized.

The graph above shows that redistribution has cushioned the blow a bit -- the increasing gap between the two lines means that the government has been somewhat effective in fighting the trend. What this means, though, is that the middle part of the income distribution is increasingly dependent on government benefits for its daily bread. Here’s a graph of how the middle class has come to rely more on various forms of welfare spending:

A Helping Hand for the Middle Class

Transfer payments received by the middle 40%

Source: Gabriel Zucman, University of California-Berkeley

This brings me to my main worry about the new distributional national accounts. These numbers are all in terms of income, which is measured in dollars. But we still live in a world where there are many important things that dollars can’t buy -- for example, the social prestige and self-respect that come from having a job.

Refocusing attention from GDP growth to income inequality is dangerous, because GDP growth and employment levels are strongly correlated. If we de-emphasize growth in order to fight inequality, we might recommend policies that fill people’s bank accounts but strip some of the meaning and dignity from their lives.

But despite this risk, I think it’s good for economists to have these new numbers. It’s more important than ever to pay attention to the moral questions in the economy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Noah Smith at nsmith150@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE
    Comments