Tuesday, February 14, 2017

Economics Policies Have Losers and Winners. Why Don't Experts Talk About It?

Often, economic policies are justified by appeal to the fact that they will increase overall economic growth. And sometimes, resistance to those policies is framed as ignorance or lack of understanding about how economies work.

For example, in discussions of free trade and globalization, it is said in their favor that in certain contexts they are a kind of win-win: economic activity goes up, so things are just better overall.

Of course, as has been long understood, there's a problem: things being "better overall" is compatible with some people being made worse off -- perhaps even dramatically worse off. If a change in policy creates winners and losers, then as long as the winners gain more than the losers lose, this is making things "better overall."

Just as a simple example, policies that facilitate free trade might allow a commodity to be produced in a different country at lower cost. Shareholders of the company making the commodity might be made better off, and consumers who want to buy it might be made better off, while workers who used to produce that commodity at home will be made worse off -- because they will lose their jobs.

So, sometimes there are winners and losers. In a society committed to democracy, justice, and respect for persons, how is it OK to just create winners at the loser's expense?

You wouldn't know it to read the news, but this is something people have actually given quite a bit of thought to, and there are a couple of potential answers.

One answer is that they way things are should be evaluated not for being "best overall" but rather for being what's called "Pareto optimal": this means that no one could be made better off without making someone else worse off. "Pareto improvements" make some people better off without making anyone else worse off. One way to think about "Pareto improvements" is that since they are changes that make someone better off without making anyone worse off, they are changes that everyone would consent to -- at least in the abstract.

Personally, I'm skeptical about this idea of abstract consent. If you're a member of a historically oppressed and marginalized group, and a policy could create improvements for people in the dominant group and no improvements for people in your group, why would you consent in the abstract? I wouldn't.

But what's more directly relevant here is that insisting that a change make a Pareto improvement is a high bar and a restrictive criterion. In essence, Pareto improvements create winners with no losers. How many economic policies or changes in society are going to do that? (Freakonomics blog says: "Extremely few"). Our imaginary example wouldn't qualify, because the workers are losing out and being made worse off.

A less restrictive criterion is "Kaldor-Hicks" efficiency, with the corresponding notion of a Kaldor-Hicks improvement. A change is an improvement in this sense "if those that are made better off could hypothetically compensate those that are made worse off (thus leading to a Pareto-improving outcome)."

Now, maybe we're getting somewhere. In our imaginary example, the change would be a Kaldor-Hicks improvement if the amount by which the winners would gain would be greater than the amount by which the losers would lose. If the winners' gains were used to compensate the losers, they'd still have gains left over, and then, bracketing the problem of historical injustice, we are at least approaching the idea of the change being a "win-win" and something that could be an improvement for everyone. There would effectively be no losers after all.

And here, finally, we arrive at the question of this post. Why do you never hear about this idea of compensation? Never mind the fact that it never happens in practice -- why does no one ever even talk about it? When's the last time you heard a policy-maker, public intellectual, or economist quoted in the news talking about how policies like free trade and changes like increased globalization are OK because, although they create winners and losers, the winners could compensate the losers so everyone is made better off?

The answer is never. I'd never heard of this criterion until I started studying philosophy of economics. So, what's up with that?

Is it: 1) that, appearances to the contrary, the criterion has nothing to do with "compensation," and is just a nice-sounding way to say that the benefits exceed the costs? So "it is justifiable for society as a whole to make some worse off if this means a greater gain for others"? So it's OK that losers lose out, and who cares?

If this is it, I think we're back at square one. Suppose a policy change will add massive wealth to the rich and take resources away from the poorest people. What if the wealth of the rich is ill-gotten gains in the first place. Does the fact that the massiveness of the wealth is massive enough make this change OK? I don't think so, and I expect a lot of other people don't think so either.

Is it 2): that policy-makers and people talking about these things know and believe in the abstract about the compensation idea, but think that talking about it publicly is gauche or dangerous? Remember how Mitt Romney said it was OK to talk about inequality, but only in "quiet rooms"?

If this is it, I take it the problems are obvious. In a democracy, you can't expect experts to work out policy solutions in quiet rooms behind closed doors and expect people to put up with it. As people are making increasingly clear, they will not put up with it.

Is it 3): that, ultra-cynically, there's a hope that the losers will just somehow die off, and leave the winners winning with all their gains intact? It might sound extreme. But if you're living in one of the areas of the US decimated by opiate addiction, job loss, and no health care, it might seem completely plausible.

Anyway, I expect that if you talk to people about these matters, most people don't know or care about abstractions involving optimality and cost-benefit-analysis, they just think that people who work hard should be able to live a decent life, and things like that. There are also people who are committed to free trade on other grounds -- absolute liberty rights, or something. My question is not about these people, but rather about the public experts who tow the party line about overall economic growth and who are immersed in this sort of thinking.

The next time such an expert is interviewed by a reporter about trade policies and economic growth, wouldn't it be great if they stopped and said, "You know, the really important thing about economic growth is that for a policy to be a good one, the winners have to compensate the losers, and so we need clear mechanisms to make that happen"?


jeff house said...

Very clear and convincing. With free trade, it's obvious that the losers never got compensated, and almost no one talked about it either. I would add that this included the unions, which opposed free trade in toto, and complained about Chapter Eleven and the dispute resolution mechanism. They never said: we support free trade if losers are compensated fully.

Janet Vickers said...

"You know, the really important thing about economic growth is that for a policy to be a good one, the winners have to compensate the losers, and so we need clear mechanisms to make that happen"?

Thank you, yes. This is much better than the winners' compulsion to belittle the losers for fear they may rise up.

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