Efficient Equality

The gap that separates the poor from the affluent has been a prime source of tension, division and violence in American life. A critical challenge for politicians and economists alike has long been to try to find a way to soften the harsher injustices of U.S. capitalism without crippling it. That is the central dilemma that Economist Arthur Okun faces in an eminently readable, slim new book, Equality and Efficiency: The Big Tradeoff, published by the Brookings Institution in Washington.

Okun, a senior fellow at Brookings, an influential liberal Democrat and a member of TIME's Board of Economists, questions the social sensitivity of capitalism. The free market, he maintains, allows "the big winners to feed their pets better than the losers can feed their children," and if left to itself, "would sweep away all other values, and establish a vending machine society." Yet the market also permits decentralization of management, encourages experimentation and innovation, and limits the power of the state to transgress on personal freedoms; by doing so, it provides incentives for work and massive production that no other system can match. Indeed, Okun asserts, "any realistic version of American socialism ... would achieve only a small improvement in equality at the expense of a significant worsening of efficiency."

Familiar Pleas. Okun argues that the U.S. can do much to create a more equitable economy while leaving the market free. Some of his ideas are familiar pleas of liberal reformers: he would have the Government strive to improve opportunities for the poor through more job-training programs and make certain that all low-income families receive food stamps, housing allowances and Medicaid. "The cliche should at least be validated," he says. "The market should not be allowed to legislate life and death."

Some of his other proposals are fresh and ingenious. For impoverished youths ready and able to enter college, Okun would set up a kind of Social Security system in reverse: the youths would get Government money to go to school and pay it back later by agreeing to subject themselves during their working years to a slightly higher tax on incomes than other people would pay. The author also would have the Government ensure that every working American earns the equivalent of about half the national average income, or between $6,000 and $7,000. One way to accomplish that goal, says Okun, would be for all workers earning the $2.10-an-hour minimum wage to get a subsidy of half that much from Washington.

To pay for such programs, Okun advocates some less-than-sweeping changes in federal tax laws. "To me," he notes, "the purpose of heavier taxation at the top of the income and wealth scale is not to bring down the affluent, but to raise up the deprived." Thus unlike some egalitarians, he would not raise taxes on salary income, remove tax breaks for homeowners or even touch the investment tax credit for businesses. But, he points out, under present law wealthy taxpayers count only half their capital gains in calculating their taxable income; Okun would reduce or even eliminate that discount. He also favors tightening up on federal estate taxes, especially to wipe out "the generation-skipping trust, by which Great Grandpa can provide abundantly for his children and grandchildren while ensuring that the estate will elude taxation during their generations."

Such changes, Okun asserts, could easily be afforded by the rich, who get more of the national wealth than is often realized. Today, it takes the earnings of nearly 20 U.S. families at the bottom of the economic pile to match the spending power of just one family with after-tax income of $50,000 a year or more. Okun also finds unconvincing the argument that higher taxes on the rich discourage savings and investment. He notes that in 1929, when federal taxes were low and minimally progressive, the U.S. saved and invested 16% of its gross national product; in 1973, after 44 years of supposedly steeper progressive taxation, it saved and invested exactly the same 16%.

Okun's arguments are open to dispute. But he has set something of a standard of realism for liberals by considering seriously the cost in efficiency of egalitarian reforms--and by conceding candidly that the inherent conflict between equality and efficiency cannot be solved, but only made more bearable.

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