Saturday, September 3, 2016

Focusing Only on Efficiency and Not Equality Has Backfired in Recent Political Debates

Vijay K. Mathur

The GOP nominee for president, Donald Trump, opposes trade pacts like NAFTA and TPP (Trans Pacific Partnership (not yet approved by the Senate) in his campaign. These pacts reduce trade barriers and tariffs. Senator Bernie Sanders, contender for the presidency in Democratic primaries, campaigned vehemently against trade pacts. The presumptive nominee Hillary Clinton has also backed out of her initial support for TPP, perceiving that the American people are not very sympathetic with the idea of trade pacts even though most economists believe these pacts promote free trade and economic growth.

Another recent example is the Brexit (exit of Britain) vote in a UK referendum on June 23, 3016. The majority of voters voted for UK to pull out of EU (European Union). This outcome was a surprise, despite warnings by concerned thoughtful politicians and economists that pulling out of EU will decrease economic growth and result in other adverse economic consequences for the economy.

These examples demonstrate that a significant number of voters in US and UK do not support the idea of efficiency without due attention to equality in public policy. In 1970’s Arthur Okun, Chairman of the Council of Economic Advisors in President Johnson’s administration, wrote a celebrated book, Equality and Efficiency, The Big Tradeoff (1975) in which he discusses the conflict between efficiency and equality. In his view, efforts to promote efficiency end up creating inequalities in income and standards of living among its citizens. Donald Trump and Bernie Sanders both alluded to harmful economic outcomes of trade pacts and globalization, thus garnering support of a significant proportion of voters.

TPP is a trade pact between 11 countries, most of which are low wage countries. We have already experienced adverse disparate economic impacts of cheap imports from China and out-migration of businesses to Mexico due to NAFTA. Economic Policy Institute, December 9, 2013, reported that movement of production resulted in 700, 000 job losses. Most losses were concentrated in California, Texas and Michigan and in the manufacturing sector. Imports from China also led to closing of plants in US manufacturing sectors, for example, steel, textiles, and furniture in certain states. The same fear is associated with TPP.

However, aside from globalization and trade pacts there are other reasons, such as skill-based technical change, decline of trade unions and low minimum wages for the increase in income inequality in the US. But the fact that free trade promoted by trade pacts is efficient and economically sound policy does not negate the other evidence that certain regions and labor force sectors in the country have faced detrimental economic consequences of globalization.

The evidence on the outcome of the Brexit vote is mixed. Some are of the view that UK voters did not want to be governed by the dictates of EU institutions. Some were apprehensive about the free flow of people between EU countries, especially now when there is a large in-migration of people into EU countries from Middle-Eastern countries. One could argue that allowing free flow of labor is an efficient policy, however from equality perspective, free flow of labor, especially from low wage countries, has a downward effect on overall wages. Hence, free flow of labor from those countries poses a conflict between efficiency and equality, because it skews the distribution of income in favor of capital.

Illegal immigration issue in the US also poses the same problem. A significant proportion of the American voters who support Donald Trump are also concerned about illegal immigration and its effect on wages and public benefits of citizens. However, the facts are that undocumented in-migrants from Mexico and other Central American countries provide low wage labor in certain sectors of the US economy where natives are not willing to work at those wages.

Nevertheless, the evidence also shows that for decades there is a redistribution of income from labor to capital. It may not be due to cheap illegal immigration, however labor does feel that lower wages of migrants, though efficient for businesses, is not improving their own standard of living. In addition, redistribution of income from labor to capital is also due to the increase in the industrial concentration and lack of competition in US markets. The Economist, March 26-April 1, 2016, points out that increase in monopoly power, and hence diminished competition, is not only inefficient but also inequitable. It results in higher profits and return to capital, high prices and/or lower wages. Therefore enforcement of Antitrust Laws against industrial concentration would improve both efficiency and equality.

Joseph Stiglitz, Nobel Laureate in Economics, in The Price of Inequality (2013), presents a cogent analysis of the inequality efficiency trade-off and states that “we could have a more efficient and productive economy with more equality” by curbing practices such as rent seeking, using political favors, and market failures.

I am not against free trade and legal immigration. They do promote efficiencies and growth in the long run. Nevertheless, public policy requires evidence based decision making, accounting of costs and benefits and their adverse distributional consequences and remedial actions for those consequences. Even Arthur Okun in his 1970 book, The Political Economy of Prosperity, recognized that economist should pay due attention to equity while “preserving efficiency.”

Mathur is former chair and professor of economics, and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden, Utah.

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