Ethics versus efficiency

If there exists a society that doesn’t struggle with the ethics (or equality) versus efficiency tradeoff, I’ve never heard of it. Moreover, the U.S. is not that society, not by a long shot.

The question I’ve asked myself and readers recently is, how do we decide where on the continuum between the two a particular good belongs? Do we just “know it when we see it”? Maybe, though we each see it differently, so I’m not sure what it is we really, collectively, know.

Matt Yglesias says all this it in a way I never could:

[B]olstering the living standards of old people is an economically inefficient undertaking that we sentimental human beings find ethically appealing. That’s not to say that the spot on the continuum occupied by current policy is the best possible way to make the tradeoff. But it’s simply to dramatize the nature of calculus we’re talking about. As a “business strategy” it’s ridiculous—on a par with preserving the natural beauty of the Grand Canyon or having the military pay health care costs of soldiers who are too injured to fight—but that’s because it’s not a business strategy.

I’m not an expert in business, though I help run a small one. However, I would expect a business strategy to illustrate how the enterprise is going to earn revenue at least as great as costs. Are “old people” willing to pay for the full costs of what they receive? Some are, some do/have, and some cannot. Hence, if the enterprise is to “bolster the living standards of old people” — all of them — some redistribution of income is required. That’s where equality comes in, and the concept of a merit good (Yglesias’s “ethically appealing”).

Though charities can (and do) redistribute income, it’s a role largely played by the government. With respect to the elderly, history suggests that charity was insufficient in providing income and health care needs, perhaps due to a free rider problem (why should I provide the charity if you will?). Hence, Medicare and Social Security. In other words, government plays a large taxation and redistribution role in areas the private sector fell short of our ethical standards and where the market couldn’t motivate collective action. It seems, then, that if we want some degree of equality of service, we have to concede taxation and redistribution, at least, to the public sector. Now, how much do we want, for whom, and whence the transfer payment?

That’s not deep. It’s obvious. It’s what the whole debate is about: how much to tax the rich and give the poor. Yet it is a problem so obvious, so plainly divisive, we cannot solve it. The political equilibrium seems to be to tax the rich far less than would be required to pay for the services provided the poor. Our ethics really do bind us to a failed enterprise, outpacing our efficiency at generating the revenue to fund them. It’s neither a way to run a business, nor a country, not one we want to see around for a while.

Precisely because this is a clash of ethics and efficiency it involves both the government and the market. Both have failures, but neither is dispensable.

UPDATE: Ezra Klein flips this around, offering the idea that we can reduce the burden of the old on the young by increasing the population that is young. There are two ways, one of which has a straight-forward policy lever, immigration. (We could encourage a higher birth rate, but it isn’t as direct.)

UPDATE 2: Revised to reflect the fact that charities redistribute income too.

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