Pie: size and slice

One of the most heated debates of the current presidential election season surrounds our social safety net. It should come as no surprise that, according to Congressional Budget Office data, the United States’s spending on entitlement programs, especially Social Security, Medicare and Medicaid, is projected to overtake total government revenue by 2025. Debates about reform, however, have to address not only the quality of these programs but also their solvency, i.e., whether and how they can even exist in the future.

The undercurrent of many public sphere debates is the equity versus efficiency trade-off. It essentially says we can’t win: Either we increase productivity or we more equitably distribute the gains, but not both. If prosperity were a pie, then efficiency would affect the size of the pie and equity would represent how even the slices are.

This trade-off has played a crucial role in understanding policy decisions and political stances. Anyone who has taken an intro economics course can graphically draw the “deadweight loss” to efficiency that results from many policies that strive to increase equity, like minimum wage laws or redistributive taxes. It’s also intuitive: If I’m receiving unemployment compensation, I might be less motivated to find my next job.

When this analysis is applied to complex issues, however, it becomes dangerously narrow. In 2008, Mitt Romney wrote “Let Detroit Go Bankrupt,” a New York Times op-ed in response to the requests from General Motors, Ford and Chrysler for bailouts. Romney advised against the bailout on the grounds that a bankruptcy would be beneficial, causing the industry “to drastically restructure itself.” A main point of his argument was advocating efficiency at the expense of equity: If workers’ retiree benefits and pay were cut, he argued, production costs would decrease and the three companies would become more competitive in the global auto industry.

Though the efficiency-equity trade-off is an important construct, I don’t think it should be applied so easily within real policy issues. It’s not just Romney; I’m guilty too. I support a right to health care, but when it was time for me to use the National Health Service (NHS) during my study abroad in the United Kingdom, I casually assumed it would be inefficient and of lower quality than my private providers in North Carolina. The NHS is so much more equitable than any health insurance programs in the United States, so I thought it would be pretty uncompetitive and inefficient. It wasn’t a perfect system, but all of my experiences were agreeable and I grew to appreciate the service.

I think that rather than visualizing a “trade-off,” we should sometimes consider the debate to be about “interdependence.” You need equity to increase efficiency, and you need efficiency to guarantee equity. They’re symbiotic. And if you have a country with a really strong infrastructure, maybe they’re even synergistic.

The Human Development Index (HDI), which is a measure of literacy, life expectancy, education and living standards, is the highest in Norway. For comparison, The United States is fourth in the rankings. Norway is a modern welfare state, with a strong social safety net and public services. India and Brazil, which are 134th and 85th respectively in the HDI ranking, also have strong tendencies towards welfare state policies. Using International Monetary Fund data from 2010-2011, Norway had a per capita income of $53,471 (about $5,000 more than the United States), compared to Brazil’s $11,769 and India’s $3,694. Norway’s example shows that a country can be equitable and still rich overall. India and Brazil are examples where, despite support for welfare policies, equity is constrained by the lack of overall efficiency and level of wealth. These two nations have expanding GDPs though, so if they invest in education and infrastructure, I think both total wealth and distribution of wealth may flourish. There doesn’t have to be a trade-off.

No nation, the United States included, can afford to simplify important decisions into equity versus efficiency. The stakes are too high. At worst, there could be a global race-to-the-bottom: Nations or companies could choose to singly target efficiency in order to be competitive within the market economy, throwing aside labor standards, workers’ benefits, corporate social responsibility or environmental concerns. Equally bad is single-mindedly pursuing equity without a concern for how much pie there is to share. At best, though, we can change our thinking from “trade-off” to “combined effort,” and then maybe we can focus on optimal reform rather than political divisiveness when it comes to understanding our social safety net.