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The Dubious Trade-Off That Economists Love to Cite

WASHINGTON, DC - JULY 13: Activists participate in a rally urging the expansion of Social Security benefits in front of the White House July 13, 2015 in Washington, DC. Social Security Works, the AFL-CIO and additional organizations held the event to deliver “more than 2 million petition signatures” in support of expanding Social Security benefits. (Photo by Win McNamee/Getty Images)
WASHINGTON, DC - JULY 13: Activists participate in a rally urging the expansion of Social Security benefits in front of the White House July 13, 2015 in Washington, DC. Social Security Works, the AFL-CIO and additional organizations held the event to deliver “more than 2 million petition signatures” in support of expanding Social Security benefits. (Photo by Win McNamee/Getty Images) (Photographer: Win McNamee/Getty Images North America)

To learn how an economist really thinks, ask them which mainstream economic idea bugs them most. You’ll get a wide range of responses, from “too much belief in laissez-faire” to “not enough use of machine learning.” Here is my answer: the way the equity-efficiency trade-off is invoked in policy discussions.

To win this competition for worst idea, the idea has to be in widespread use, it has to be embraced by many of the professional elite, and it ought to be flat-out wrong or misleading. You can’t just pick a bad idea that hasn’t caught on, such as modern monetary theory.

The equity-efficiency trade-off, in its simplest form, argues that economists should consider both equity (how a policy affects various interested parties) and efficiency (how well a policy targets the party it is intended to affect) in making policy judgments.

So far so good. I start getting nervous, however, when I see equity given special status. After all, it most often is called “the equity-efficiency trade-off,” not “an equity-efficiency tradeoff,” and it is prominent in mainstream economics textbooks. By simply reiterating a concept, economists are trying to elevate their preferred value over a number of alternatives. They are trying to make economics more pluralistic with respect to values, but in reality they are making it more provincial.

If you poll the American people on their most important values, you will get a diverse set of answers, depending on whom you ask and how the question is worded. Americans will cite values such as individualism, liberty, community, godliness, merit and, yes equity (as they should). Another answer — taking care of their elders, especially if they contributed to the nation in their earlier years — does not always show up in polls, but seems to have a grip on many national policies and people’s minds.

I hear frequently about the equity-efficiency trade-off, but much less about the trade-offs between efficiency and these other values. Mainstream economists seldom debate the value trade-offs between efficiency and individualism, for instance, though such conflicts were of central concern to many Americans during the pandemic.

To cite another example, many economists have argued that the US should cut Medicare expenditures and instead spend that money on Medicaid, and more generally on health care and aid for younger people. (An early version of the Affordable Care Act tried to do exactly that.) I agree with this argument, but still I see an obvious trade-off: The US would be boosting efficiency — there is a higher return from spending on the young — but arguably taking something away from deserving old people. Yet I hardly ever hear economists discuss the “efficiency vs. desert for the elderly trade-off.” Of course voters talk about it a lot, albeit using simpler terminology.

There is a large branch of economics, stemming from the research of Nobel laureate Amartya Sen, focusing on normative trade-offs involving liberty. Yet Sen’s concept of liberty is so foreign to the American mindset it is hard to explain. For Sen, you have liberty only if you cannot make a reciprocal deal with another person — involving a corresponding commitment from the other person.

Patrick Henry would roll over in his grave. For many American citizens, liberty means a right to free speech, or perhaps freedom from onerous regulation or excess taxes. Not for Sen and the extensive branch of social choice theory he birthed. Yet an entire branch of economics supposedly concerned with “liberty” went off in this direction with many hundreds of journal articles, all missing the point.

Surveys have shown that a strong majority of academic economists prefer Democrats. Yet most economists, including Democrats, should pay more attention to the values of ordinary Americans and less attention to the values of their own segment of the intelligentsia. That also would bring them closer to most Democratic Party voters, not to mention swing voters and many Republicans. Equity is just one value of many, and it is not self-evidently the value economists ought to be most concerned with elevating.

Many economists consider it a sign of their humanity that they are willing to moderate efficiency for the sake of equity. They are not wrong. It would be more humane yet to dethrone the equity-efficiency trade-off from its central position in economic discourse.

More From Bloomberg Opinion:

• Fight Poverty or Inflation? It’s a Trade-Off: Eduardo Porter

• The Unavoidable Coronavirus Trade-Off: Clive Crook

• The Trade-Off Between Jobs and Inflation Disappears: Noah Smith

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. He is coauthor of “Talent: How to Identify Energizers, Creatives, and Winners Around the World.”

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