Evan Soltas
Mar 28, 2012

Winners and Losers

A response to Ozimek and follow-up from yesterday

Adam Ozimek of the blog "Modeled Behavior" -- I'm going to put a link to that on "what I read," because I read him, Karl Smith, et al. all the time -- has a very thoughtful, and thought-provoking, post on how economists make inconsistent normative judgments about policy matters.

It's succint, so I'll quote in full and then offer my own two cents:

Not everyone will lose from climate change, or to put it another way, not everyone would gain from climate change mitigation policies. But a smart mitigation policy, like a carbon tax, creates more benefits overall than costs. Some people will see the benefits over gains as sufficient justification for mitigation policy, but others oppose such policies unless the redistributive effects of the policies are compensated for so that the change is a pareto improvement. With climate change this would be, for example, areas of the country where cheap gas prices or carbon based energy production are disproportionately important.

Not everyone will lose from protectionism, or to put it another way, not everyone would gain from free trade. But free trade creates more benefits overall than costs. Some people will see the benefits over gains as sufficient justification for free trade, but others oppose such policies unless the redistributive effects of the policies are compensated for so that the change is a pareto improvement. With free trade this would be, for example, areas of the country where manufacturing jobs that would be displaced by trade competition is disproportionately important.

I don’t think there will be much of a correlation between these positions, yet they use similar logic. How do people decide when redistribution effects of a policy change are sufficient to overcome the desirability of benefits exceeding costs? Is there something more than political allegiance going on here?

I think, first of all, that Ozimek is right that in practice the line between normative and positive economic reasoning is not always clearly drawn. One can evaluate the strengths and weaknesses, or count the beneficiaries and the harmed, from given economic policy options and remain in the land of positive economics.

But the simple weighing of net benefits is insufficient to determine the proper course of policy. Whenever economic policies are redistributive, a normative economic decision is required, Ozimek says.

In my mind, this is consistent with a non-utilitarian philosophy I associate with Robert Nozick. A utilitarian would, by definition, consider any redistribution which has positive net benefit to be justified by the existence of the net benefit. The moment we say that a cost-benefit calculation does not in itself justify government policy, we are all non-utilitarians now.

Ozimek argues most of us are inconsistent in our utilitarianism. For example, mosts economists believe in large long-run net gains from trade, but it stands to reason there are individuals who are in the long run made worse off by free trade -- and for them, I see a valid argument that any government which institutes free trade policies has a normative economic obligation to enact policies which are Pareto-efficient and soften the blow on the harmed (i.e. don't institute trade protection, but perhaps offer retraining programs).

Operating now from a strictly non-utilitarian perspective -- i.e. a deontological "side constraint" against redistribution -- then I do think there is a consistent argument which goes beyond "political allegiance."

Ozimek is working, I think, from an implied assumption that the current distribution of income is just, or at least doing no normative wrong. Therefore, he is able to say, any policy which creates deviation  from this distribution faces a normative economic problem -- the "long-run losers" from free trade, in our original example.

Yet if one explicitly assumes that the current distribution is unjust, and that there should be a normative presumption of free trade and no taxes. This is, in effect, working from the presumption that negative liberties do not produce unjust outcomes. Second, this reasoning places the "burden of proof" on the government to show that any policy would not have distributional consequences which move away from the just distribution. (Admittedly, I am borrowing heavily from Nozick's Anarchy, State, and Utopia, which I recommend and read last summer.) This would make government policy which restricts freedom to trade unjust by rendering just the incidental redistribution which comes from an expansion of free trade; at the same time, this line of reasoning would also consider a carbon tax unjust. So people who are uncomfortable with the idea of a carbon tax but support free trade -- like me -- if we are to be consistent with our non-utilitarianism must consider just a particular distribution which may not be extant.

If we assume that a carbon tax would have net benefits -- I have some real concerns about that -- then I think I would be a sort of conciliatory non-utilitarian: inclined to push for some degree of compensation to limit the losses for individuals, but ultimately in favor of both policies on utilitarian grounds. I don't think cost-benefit evaluations can ever alone justify policy, even though they are useful, and probably should in the end guide it. This to me suggests that I do operate with a certain distribution in mind which I assume to be just, but also that I think we should be sensitive to any substantial changes in the existing distribution.

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I want to add a little more, too, about unpaid internships. Basil, a commenter, points out fairly enough that I didn't explore another part of it:
You didn't address the second part of the argument - "the unevenly-distributed benefits of unpaid internships to the wealthy." This is the convincing point, in my view.

Unpaid internships exacerbate inequality since those who are better off can afford to invest in these internships with the long-term payoffs that you mention, while the less fortunate do not have the opportunity to do so and must look for paying work.

Respectfully, I don't agree with what implications Basil tries to draw from this argument. (It is at least plausible that unpaid internships increase inequality, but I couldn't find any reliable empirical evidence for this. Arguably, less competition for paid employment would result from unpaid internships, and this would benefit the the same demographic as those not able to afford unpaid internships.) A lot of things provide unevenly-distributed benefits: college education, for example. We don't ban them, even though it provides such a long-term payoff. This is because the root problem isn't the internships -- it's the fact that the poor place have a higher marginal utility for each dollar than do the wealthy and apply a larger discount rate over time.

Arguably, the internships can act to some extent as a positional good in the labor market such that the poor are made objectively worse off, but I don't accept the idea that the internships provide no value other than positional benefits. There must, therefore, be a net social gain from the internships. The optimal policy response, if non-utilitarian principles require that any action of government be Pareto optimal, is to side payments through government.