July 02, 2016
Neil Irwin raises the question of whether economists have been too single-minded in pushing efficiency, while ignoring issues of distribution. This is way, way too generous to economists. In fact, economists have been totally happy to ignore efficiency considerations when the inefficiencies redistribute income upward. This situation pops up all the time.
As I frequently point out in comments here and elsewhere, we protect doctors, dentists and other highly paid professionals from competition with their lower paid counterparts in the developing world or even other wealthy countries. We have maintained these protections even while our trade negotiators did everything they could to make steel workers and textile workers compete against their low-paid counterparts in Mexico, China, and other developing countries.
This protectionism is obviously inefficient and cost U.S. consumers more than $100 billion a year in higher medical bills and other costs. Yet economists act really dumb when questioned about it. Apparently, it never occurred to them that competent doctors could be trained in Mexico, India, or even Germany. Sorry folks, economists don’t give a damn about efficiency in this case. They want to protect the income of highly paid professionals.
The same story applies to patent and copyright protection. These are forms of protection that can be equivalent to a tariff of 1,000 percent or even 10,000 percent. The worst abuses are in the prescription drug industry where we spend around $430 billion a year on drugs that would cost around $40 billion in a free market. This is throwing $390 billion a year into the toilet and worsening people’s health. Where is there concern for efficiency in this case?
How about Wall Street? The narrow securities and commodities trading sector has quintupled relative to the size of the economy over the last four decades. Is there any evidence this has caused capital to be allocated more efficiently? If we cut back the sector to half its current size (a financial transactions tax could do this quickly), it would eliminate around $140 billion a year in wasteful trading. This money is income to the Wall Street bankers and hedge fund types. That is probably why most economists show little interest in a tax that could hugely increase the efficiency of the financial sector.
And we have a corporate governance structure that is a cesspool of corruption. Corporate directors can count on generous stipends of $200,000–$400,000 for showing up at a six to ten meetings a year. They are almost never fired. All they have to do is to sign off on the ever larger paychecks for CEOs. The bloated pay of CEOs not only directly takes money away from shareholders (some of whom are pension funds and 401(k) holders), but they also lead to bloated pay for university presidents, as well as presidents of private charities and foundations. Economists concerned about efficiency would be looking to rewrite the rules of corporate governance to ensure accountability, but that would hurt those at the top.
There is a longer list of areas where increased efficiency would be associated with a more equal distribution of income, but economists generally are not interested in such instances. They are far more interested in pushing trade and other policies that redistribute income upward — even if they have to mislead the public on the efficiency gains. (The Trans-Pacific Partnership (TPP) is an excellent example. The Peterson Institute study cited by Irwin doesn’t even take account of the costs associated with stronger and longer patent and copyright protection.)
In short, Irwin is way too kind to economists. They care hugely about distribution. They have been actively pushing policies to redistribute income upward for the last four decades.
Addendum:
It is worth noting that the gains from the TPP projected by Peterson Institute study are more than twice as large as the gains projected by the non-partisan International Trade Commission (ITC). The ITC study projected that when most of the deal’s benefits are fully realized in 2032, the benefits will be a bit larger than a typical month of GDP growth. This study also did not account for the costs associated with stronger and longer patent and copyright rules.
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