Guest opinion: Taking a closer look at income inequality
There is little doubt that income distribution among Americans, as measured by the percent of the Gross Domestic Product (GDP) distributed to various income groups, has become less equal in the past 40 years. Aside from the issue of “fairness,” which in and of itself is important, income inequality has significant negative economic impacts. When wealth is thought to be extremely unequal, social unrest can occur, causing among other issues a decline in labor market participation and eventually deterioration of the economy.
It is at these times that government is called upon to create a more balanced distribution of income. The spate of recent legislation as revealed in the “Inflation Reduction Act,” as well as previous pandemic relief programs, is the most recent example of an attempt to produce a more equitable economy.
Like most of the policies enacted to assure greater income equality, this Act involves a trade-off between equity and efficiency. Economic efficiency is shorthand for the optimal use of resources such as land, labor, raw materials, and financial capital used to produce the GDP. The larger the GDP the more resources are available for Americans. Conversely, the greater the cost of more government equity programs, the fewer goods, services and jobs will be available for Americans both today and into the future.
For instance, to relieve the negative impact of the pandemic on equity among Americans, the federal government under both Trump and Biden devised a variety of income supplements such as the Paycheck Protection Program (PPP), the expansion of various unemployment benefits, and the guarantee of loans to businesses so to maintain their employees. These and various other directives were implemented to try to ensure that the inequities caused by the pandemic were partially ameliorated.
Each of these policies had an opposite effect in terms of economic efficiency. The PPP provided funds so that companies would not lay off employees. In economic terms, the cost of the PPP was that while employees were receiving a paycheck, they were either not working or working less than they had before the pandemic. In terms of the overall economy, these employees, through no fault of their own, were less efficient than they had been before the pandemic. Of course, the PPP and similar programs were enacted to help people by trying to maintain an “equitable” share of the proceeds of the economy. However, the cost of these programs is the economic inefficiency caused by paying people who were producing less than they had previously.
This trade-off between equity and efficiency was further exacerbated by the wave of pandemic fraud perpetrated when hastily conceived distribution of relief funds occurred. The Justice Department is currently investigating tens of thousands of fraud cases with an estimated value of $6 billion.
The trade-offs between equity and efficiency have been foremost in economists’ thinking for years. In his book, “The Big Tradeoff,” Arthur Okum, Chair of the Council of Economic Advisors, under President Johnson, studied the trade-offs between equity and efficiency. Okum pointed out that policies designed to lessen inequality in society always had “leaks” which he described as inefficiencies that occurred in the government distribution of funds often due to bureaucratic issues. Perhaps the illegal distribution of pandemic relief programs is best described as a gusher rather than a leak.
Leaks in the distribution of public funds are almost inevitable in any kind of policy designed to increase equity. The amount of leakage cannot necessarily be projected at the beginning of new programs, but it will most certainly occur. Such was the case with the various pandemic relief programs which allocated dollars to many ineligible recipients. However, policy makers decided that the urgency of helping those harmed by the pandemic outweighed the inevitable loss of economic efficiency.
The problem, of course, is that over time these ‘’leaks” add up resulting in billions of tax-payer dollars spent in ways that create economic inefficiency, diminish the GDP, and threaten the growth that the economy depends upon to assure that Americans continue to enjoy a high standard of living. It therefore behooves legislatures and government officials to be parsimonious in the awarding of taxpayer’s money, something that has recently been almost non-existent.
Michael A. MacDowell is President Emeritus of Misericordia University where he occasionally taught economics. He lives in Estero, FL.
This article originally appeared on Fort Myers News-Press: How Inflation Reduction act is used to produce equitable economy
