• 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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    • Austin, I think some charitable organizations will take issue with your statement: “A business can’t redistribute income. That is, the private sector cannot.” Given that redistribution is likely a public good and because of the associated free-rider problem, too little will be redistributed by the private sector. Hence the government. I only wonder who is a more (technically) efficient redistributor of income – the private (nonprofit) or public sector?

    • 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.

      I would disagree that charity broadly defined was insufficient in providing health care needs of the elderly before medicare. There was little effective health care for the elderly in 1965.

      There is not so much effective health care for the elderly today. It seems most elder care is ineffective.

      So an interesting questions is why did government/the median voter decide to provide health care for the elderly before providing it for the young.

      Also i think that total medical spending was about 5% of GDP when medicare was enacted today it is over 17% of GDP. What makes sense for spending 5% of GDP may not make sense for spending 17% of GDP. IMO individual control and preferences are much more important in spending 17% of GDP.

      Social security when enacted was as much a misguided jobs program as charity for the elderly. Social Security may have been a factor in medicare because SS encourages the elder to vote and as a block. If SS did not exist and was enacted today I would guess that every retired person would get the same minimal amount (perhaps every adult citizen) and there would be no FICA tax.

      • @Floccina – You read Paul Starr’s book? I don’t think there was no effective care for a 65 year old in 1965. I also disagree that there is no effective care for such a person (and older) today.

        SS a jobs program? Sorry, but no.

    • “So an interesting questions is why did government/the median voter decide to provide health care for the elderly before providing it for the young.”

      The elderly vote, in high percentages.

      Steve