The 'big trade-off' debunked: the efficiency of a fair economy.

• Author: Thurow, Lester C.
• Position: Includes article on industrial policy

The "Big Trade-Off' Debunked: The Efficiency of a Fair Economy

Americans are uncomfortable when it comes to talking about equity or economic fairness. They are willing to help those in need, but they don't like to think about economic justice in a larger context. Americans wish that the issues of economic equity would go away and hope that the market will turn up an acceptable distribution of income. Perhaps because of this strongly held desire, Americans of all income classes tend to believe that the distribution of income and wealth is more equal than it is.

As the income of the middle class has declined, the American distribution of income has become noticeably more unequal. Between 1969 and 1982 the income share going to the bettom 50 percent of all American families has fallen from 23 to 20 percent of the total; the income share going to the next 40 percent has fallen from 48 to 47 percent, while the income share of the top 10 percent of the population has risen from 29 to 33 percent of the total. As officially defined ($10,178 for a family of four in 1983), poverty is now rising rapidly, and about half of the people being added to the poverty rolls are children.

While slow productivity growth, recessions, demography, and trade deficits played a role in these adverse trends, the programs of the Reagan Administration have contributed to the changes. According to the Congressional Budget Office, Reagan programs added 557,000 people to the poverty rolls. The Urban Institute estimates that Reagan programs subtracted $281 from the average income of those in the poorest 20 percent of all families, while adding $598 to the average income of those in the richest 20 percent of all families.

If one looks at the distribution of wealth (net worth), inequalities are larger and growing more rapidly than those of income. While the top 10 percent of the population receives 33 percent of total income, they own 57 percent of total net worth. Almost 20 percent of all American families have zero or negative net worth.

The problem of economic justice is not going to go away as long as black males earn significantly less than white males (58 percent as much in 1983), as long as women earn significantly less than males (64 percent as much in 1983), and as long as the gaps between rich and poor are growing as they now are. Income distribution problems may for a while be superseded by other problems and lie dormant, but they will inevitably reappear. Democracies that profess to believe in political equality live only uneasily with rising economic inequalities.

Historically, it has been the role of the Democratic Party to work for economic justice. This is a role it cannot and should not attempt to jettison. Almost without notice, however, there has been a shift in the perceived strategy for dealing with economic injustice. Today the Democratic Party is tagged as the party in favor of welfare--income transfer payments. Such an identification is recent and in some ways not fair. Not so long ago welfare programs were seen by Democrats as a second-best temporary solution to a problem that required a first-best permanent solution.

A lesson from LBJ

In 1964, armed with a brand-new Ph.D. in economics and having just gone to work for the President's Council of Economic Advisers, I was given the task, at what I was told were the direct personal orders of President Johnson, of going through the Economic Report of the President and making sure that the words "welfare' and "income transfer payments' never appeared and never were associated with Johnson's Great Society programs. In Johnson's view, the Great Society programs (more education, more manpower training, less discrimination, more jobs) were to help people earn their own incomes. They were not income transfer payments designed to give anyone an income without work. At the time I remember thinking that I had been given a rather silly task. I no longer believe it was.

Looking back at Roosevelt and the New Deal, the same beliefs were firmly held. It was all right to provide relief for those who could not work (the elderly, the handicapped, the sick), and it was all right to give temporary relief to those who had previously been working and who had been thrown out of work (unemployment insurance), but permanent general welfare programs were never part of the New Deal ideology. Instead, jobs were provided. In 1938, 4.3 million people were employed in agencies such as the Works Projects Administration, the Civilian Conservation Corps, and the National Youth Administration. To employ the same fraction of the labor force today, more than 9 million jobs would have to be provided.

If one asks why the Democratic Party shifted from being a party with an emphasis on jobs and an opening up of opportunities for higher earnings to being seen as a party identified with higher welfare payments, there is an interesting story to be told. While one would think that there would be less political resistance to job programs than there would be to welfare programs (and that is true for the general amorphous public), precisely the reverse is true when it comes to special-interest groups. Most of these special-interest groups are producer groups, and they are much more willing to see general tax revenue go for expanded welfare programs than they are to see government actively working to create jobs or working to alter the distribution of earnings. Producer groups pay only part of the higher taxes necessary to finance more welfare payments, but any restructuring of the economy to produce more jobs or a more equal distribution of earnings directly threatens their current position.

As a result, an implicit compromise was worked out during the Nixon Administration. Programs would be expanded to help the poor, but they would be welfare programs and not programs that required any fundamental restructuring of the economy. After...