Watch what you Say in the Echo Chamber

In a recent blog post, Paul Krugman points out that there is no conflict between “standard economics” and concern about growing income inequality.

You can be perfectly conventional in your economics […] while still taking inequality very seriously.

This is absolutely correct and it’s a stance which economists need to embrace more often than they do. In an earlier post I argued that concern about income inequality is legitimate irrespective of how you think the economy works. You don’t need additional justification to desire a more equitable distribution of income or well-being. I personally count myself as an economist who more or less accepts the basic principles of the field, but who also recognizes that dealing effectively with the current state of income inequality is simply a necessity.

However, while Krugman is quite right in this case, both he and Noah Smith have made some remarks which I think liberals should never make. The remarks came in response to a commencement speech by Tom Sargent which has attracted a surprising amount of commentary among online commentators. In the convention speech, Sargent outlined 12 principles of economics that he felt college graduates should know. The principles were pretty uncontroversial and probably a good thing for Berkeley undergraduates to hear before the go out into the real world. However, one of Sargent’s principles struck a nerve:

There are tradeoffs between equality and efficiency.

Paul Krugman took issue with this remark saying that reducing income inequality might actually increase economic growth and (for an economy at the zero lower bound) that government spending “more than pays for itself.” He closes his remarks by saying that Sargent’s speech is simply “anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths.” those people commenting favorably on Sargent’s commencement address are simply advancing “anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths.” [1]

Noah Smith similarly found fault with the equity efficiency remark. He writes that it’s not generally true that there is such a tradeoff and he cites the Second Welfare Theorem as justification. As he goes through the list, Noah remarks that he can “start to see a policy implication emerge from the list” and in the end it all shapes up to be “one big caution against well-meaning government intervention in the economy by do-gooding liberals concerned about promoting equality and helping the poor.”

I understand the reactions by Noah and Paul. I just wish they wouldn’t succumb to the temptation to write this stuff. The truth is that most of the principles of standard economics carry with them a fairly conservative / neo-liberal message. I know there are exceptions but they are just that – exceptions. The truth is that if we want to really attack the problem of income inequality (promote equality and help the poor) then we are going to have to take stuff away from richer people and channel it to poorer people. This kind of action will most likely have consequences for markets and these consequences will be unsavory. Paul and Noah could argue (quite strongly I suspect) that these costs might be relatively small but they should not act as though they really think there are no costs. (In case you’re wondering, the Second Welfare Theorem says that if we can costlessly transfer resources across individuals then any efficient outcome can be supported as a market equilibrium…)

If you are a liberal, let me give you a sense of why this is a costly statement to make. Suppose one of Sargent’s principles included a public finance tradeoff: there is a tradeoff between low tax rates and high tax revenue. A conservative might take issue with this claim and write ‘you know this isn’t necessarily true. According to some models, lower tax rates actually lead to more revenue because they encourage economic activity.’ The conservative would of course be “correct” in a very narrow sense (this is a theoretical possibility) but he or she would be offering a very tempting fiction to their audience and to the public – the idea that you can have everything you want at no cost. Neither liberals nor conservatives should make remarks like this. When they do, it invariably costs them credibility and serves to drive a further wedge between voters who are already too polarized.

Talking in an echo chamber can be fun but public intellectuals like Paul and Noah have a greater responsibility to self-censor than most because they have large audiences. They have a responsibility to the public and also a responsibility to their liberal readers who take their statements to heart. The conservative echo chamber is probably worse than the liberal echo chamber (you can cut tax rates and raise tax revenue, cutting spending will stimulate the economy, the affordable care act is going to cripple the economy, … ) and conservatives had paid a hefty price as a consequence. They have boxed themselves into an intellectual corner which is going to be very difficult to escape from largely because they have adopted a narrative filled with soothing fictions.

Paul’s second post is the correct path to take. Liberals can simply say “Yes, there are costs to redistribution, but it is in society’s interest to bear these costs to fix the problem of inequality.” Similarly conservatives should say “Yes there are problems with income inequality, but we have to be smart and careful about how we design transfers so as to avoid too much interference with normal market functions.”

Is that so hard?

[1] In the earlier post I misinterpreted Paul Krugman’s statement to be commenting directly on Sargent’s speech when in fact he was referring to people who were themselves commenting favorably on Sargent’s speech.  Hopefully the above correction makes clear Krugman’s actual intention. Thanks to those in the comments section who noted my mistake. CH