Wednesday, March 24, 2010

The constituency of efficiency

One of my favorite parts of introductory economics resonated with the events of the past week: efficiency has no constituency.* I bring this catchphrase up because of the interesting reading from Greg Mankiw's blog:
Arthur Okun said the big tradeoff in economics is between equality and efficiency. The health reform bill offers more equality (expanded insurance, more redistribution) and less efficiency (higher marginal tax rates). Whether you think this is a good or bad choice to make, it should not be hard to see the other point of view.

I like to think of the big tradeoff as being between community and liberty. From this perspective, the health reform bill offers more community (all Americans get health insurance, regulated by a centralized authority) and less liberty (insurance mandates, higher taxes). Once again, regardless of whether you are more communitarian or libertarian, a reasonable person should be able to understand the opposite vantagepoint.
On either side, the most fervent politics of health care has been motivated by moral convictions. The left pronounces that they are "helping the less fortunate" and "cracking down on insurance company abuses," while the right says that they are "fighting a government takeover of health care" and "saving grandma from the death panels."

The political opposition to health care reform had nothing to do with preserving economic efficiency; Political support had nothing to do with restoring efficiency either. This was a morally-motivated piece of legislation. To be fair, there are important efficiency considerations to this bill (on both sides), but that's not why it generated so much political debate.

The pivotal issue in passing the bill was whether it would fund abortions with taxpayer money. The most fervent argument against the bill was whether it would "pull the plug on grandma" by rationing care. Even the "this bill will raise your taxes" plea appealed to the voter's self-interest. It wasn't "this bill will raise your taxes, which will give you a disincentive to work, which will reduce the long-run growth rate of GDP... which will make your grandchildren much worse off." On the other side, the moral plea was "how can you deny care to the underprivileged?" In my reading of the debate, these moral pleas were the salient issues. Efficiency was an afterthought.

My takeaway is that politics is the domain for moral issues. That's because economic efficiency just doesn't appeal to people the same way as morality does. In politics, people vote on how policies affect them materially or how the policies make them feel. The pivotal voter doesn't usually vote based on how regulations will affect average (or total) well being.

In the end, those of us who care about efficiency talk about a big tradeoff between equality and efficiency. That's how we justify living in a world of efficiency-depleting policies while still caring about efficiency. But, what stuns me the most is just how absent the discussion of efficiency is from the public sphere. Different strands of morality have many constituents, but efficiency does not.

*I attribute this quote to Richard Stroup who was one of my professors at Montana State University. He may have heard it elsewhere, or he may have made it up, but it is just one of those catchphrases that applies well to the discussion of economics and politics. To be fair, it is probably not true. Economists and students of economics are constituents who care about efficiency, but we are a small, vocal minority. A big reason why we harp on efficiency in introductory microeconomics courses is to expand the constituency who cares about efficiency.

2 comments:

  1. I don't think that that is entirely true. For example, when people talk about unemployment insurance the disincentives to work that it creates are certainly discussed at length, which is at the end of the day an efficiency consideration. It's just usually wrapped in an equity argument in that it's not "fair" for some people to have to work and others not.

    I also think that efficiency considerations would have more of a place if more people understood basic economics. I'm working on that. =P

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  2. Fair enough.

    I'll admit that I have taken it a bit to the extreme in the above post. Some politicians may be motivated by efficiency considerations (perhaps because they had a good economics class?), but when it comes time to sell/debate the policy, they have to couch it into something moral/ethical.

    Given this, maybe saying that an efficiency discussion is "absent" is a bit extreme. As someone who appreciates efficiency considerations, I would like to see efficiency play a more pivotal role in policy. Often, it is in the background, and it is orthogonal to why the policy is (or is not) enacted.

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