Equality and Efficiency: The Big Tradeoff or a Free Lunch

Abstract

Arthur Okun’s famous 1974 book codified the received wisdom in economics that there is a tradeoff between equality and efficiency. Okun thought more equality was worth the cost, even though the incidence of poverty was lower and tax rates were higher when he wrote than they are now. More recent writers have challenged the tradeoff view on the grounds that great inequality of worker compensation decreases morale and reduces mass purchasing power, but this argument does not address the cost of greater redistribution by government. This article argues that government efforts to reduce poverty will result in greater economic efficiency in the U.S. because, currently, American social values lead to policies that try to correct the costly consequences of poverty but rule out policies that address the causes of poverty and prevent its social costs.