The New York Times

April 20, 2003



Efficiency And Equity (In the Same Breath)


SUPPORTERS of President Bush's tax plan don't deny that it offers little if any immediate benefit to the poorest Americans. Nor is there much doubt that the wealthiest would see the greatest gains. Yet meaningful discussion of the potential widening of inequality — the polarization of rich and poor — has been sadly lacking.


In a way, this is nothing new. Economists and policy experts routinely separate questions of efficiency from questions of equity when they discuss taxes and spending. And equity often takes the back seat. For example, the first-year college textbook written by N. Gregory Mankiw, the nominee to succeed R. Glenn Hubbard as chairman of the Council of Economic Advisers, devotes eight pages to "tax equity" from a total of at least 44 on taxes.


There is an easy justification for this pecking order: questions about redistributing wealth require moral judgments and taking sides in a philosophical debate. While economists might do this in their spare time, they are typically more interested in making objective claims that contribute to the science. By the same token, when politicians call a tax cut unfair, they don't often say why unfairness matters.


Yet a new current of economic research is bridging this divide. Academics are beginning to ask if inequality itself imposes costs on the economy. At last, the twain of efficiency and equity may be meeting.


Consider the president's tax cuts. Americans might benefit from them in two stages. First, there would be the direct benefits; people who own lots of stocks and earn lots of wages would pay much less in taxes. Next, according to the White House, companies and individuals would spend this windfall, raising demand for goods and services and driving the economy to create more jobs. Eventually, the entire economy would come to benefit from the tax cuts.


But even in this picture, the economy could still fall victim to a significant increase in inequality in the short term.


You don't have to be a so-called bleeding-heart liberal or a low-income worker to worry about inequality. Researchers have found that it creates drags on the economy that can affect everyone. After considering the White House's latest policy proposals, some top economists are making very dire predictions indeed.


The shares of income controlled by the highest-earning Americans are already higher than at any time since the 1920's, according to Thomas Piketty, a former professor of economics at M.I.T. who is now the director of studies at the École des Hautes Études en Sciences Sociales in Paris. In an e-mail message last week, he predicted severe effects from the further increase in inequality posed by the White House plan.


"These new high-income tax cuts, together with all the previous tax cuts (including the repeal of the estate tax), will eventually contribute to rebuild a class of rentiers in the U.S., whereby a small group of wealthy but untalented children controls vast segments of the U.S. economy and penniless, talented children simply can't compete," he wrote. "If such a tax policy is maintained, there is a decent probability that the U.S. will look like Old Europe prior to 1914 in a couple of generations."


PROFESSOR PIKETTY might sound like an alarmist Frenchman at a time when such people are none too popular in these parts. But he is part of a network of 18 researchers, mostly professors in the United States, sponsored by the John D. and Catherine T. MacArthur Foundation to examine the effects of inequality on economic performance. Those effects can range from extra money spent on security and monitoring to a lack of incentives for participation in the work force, innovation and entrepreneurship.


"A substantial fraction of the population — certainly more than half, possibly as much as three-quarters — simply can't borrow the types of sums that would be required to acquire the tools of their trade," said Samuel Bowles, director of the economics program at the Santa Fe Institute and co-chairman of the network. "Most of the population is not in the game."


Putting everyone into the game could improve economic growth, a result that usually benefits the wealthy at least as much as everyone else. Still, these ideas do not seem to have filtered down to Washington.


"The top two-thirds of the people in this country are the folks who pay taxes," said Senator Rick Santorum of Pennsylvania, the Republican conference chairman, on a Fox News broadcast in January. "Those are the folks you're going to have to give tax cuts to."


If Senator Santorum and others in his camp could take a slightly longer view of things, even their most loyal constituents might be grateful.