But for Ryan, fixing the economy isn’t just about eliminating the wrong incentives for the poor. It’s also about giving the right incentives to everyone else to work hard, invest and take entrepreneurial risk. So even in the face of massive budget deficits and incontrovertible evidence of rising income inequality, the Republican budget would also reduce taxes for those whose high incomes are proof not only of their superior productivity and job-creating prowess, but of their moral superiority as well. No hammocks for them.
As much as this parable of the undeserving poor and the deserving rich might offend our sense of justice, it carries a large kernel of economic truth. Economic systems that promise on equality of outcomes, whether of the communist or kibbutz variety, have repeatedly failed to deliver higher overall living standards than more market-based systems where significant gaps between rich and poor are tolerated.
In a society where incomes are made to be too equal, there is little reason to work harder or to defer current consumption in order to save and invest. There is no incentive to take the risk of launching a new enterprise or to spend hours in the lab or the garage dreaming up the next breakthrough technology. Without the prospect of earning more or getting ahead, there would be less reason for getting much beyond the most basic education and training. And it is precisely these factors — work effort, investment in human and physical capital, development of technology — that are key to determining how fast an economy grows.
In 1974, the late, great economist Arthur Okun gave a series of lectures in which he argued that there was a “nagging and pervasive trade-off” between economic equality and economic efficiency.
“We can’t have our cake of market efficiency and share it equally,” Okun told his Harvard audience. The hard questions in public policy, he argued, most often involved a balancing of these two priorities.
Four decades later, however, Okun’s “big trade-off” has been hijacked by Ryan Republicans eager to use it as a rationalization for tax cuts for the rich and service cuts for the poor. Ignoring Okun’s premise that society wants both fairness and economic growth, Republicans have not only elevated growth as the sole objective of economic policy, but declared that fairness is everywhere and always a deterrent to growth. For them, the relationship is perfectly linear: If some inequality is required to increase economic growth, as it surely is, then more inequality must always beget even more economic growth.