Americans understands very well what feels wrong – and there's a piece of U.S. economic policy that the establishment and educated elites haven’t been fully honest about, says Pia Malaney.Read more at
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Within our market economy we think of us as having the ability to vote through our dollars. So it’s one dollar, one vote. But we’ve seen inequality in this country increase so dramatically recently that we are in some sense hearing some voices much more loudly than others. If you look at the percent of income that is going to the top one percent of our population in the last 20 years it’s doubled from 10 percent to 20 percent. If you look at the pay of CEOs compared to the pay of the average production worker it went from being something like 24 times the pay of an average production worker to being closer to 200 times. In many ways the voice of our working class Americans is no longer being heard at the same level because they don’t have as much control within that economy.
So they’re looking to what we can think of as another economy, a separate place to hear their voice which is our ballot economy. And we’ve always believe that our ballot economy represents one person, one vote. Of course we’re seeing changes in that too. We have come to understand very clearly the effects of gerrymandering over the last several years. We have seen, in this last election, the impact of the electoral college and what that does to the voice of the majority. And we also understand that when you have two senators from a state like Wyoming or from Vermont and two senators from California that, in fact, we don’t really have one man, one vote. But we have enough equality within that system that we actually were forced to listen to the voices of people who have felt disenfranchised in our market economy.
So what are these policies that have caused people to react in this way? Well we can think of just a few of them if we think about finance, integration, trade. Very often we have been told by the establishment that immigration represents a win-win for America. The trade represents a win-win for America. Well, let’s delve a little deeper into that. Is that really true? As economists when we think about welfare we’re very careful to think about ourselves as technocrats. So we don’t want to decide for a society what distribution within a society should look like. And so we have this notion of welfare called Pareto welfare. And we think of something as a Pareto improvement if you can make at least one person better off by making nobody worse off. As you can imagine this is somewhat difficult within a policy context. It’s very hard to find a way to have any policies that have no negative impacts on anyone but can make some people better off.
So we found a refinement to that, something we call Kaldor-Hicks where we look at the net benefit versus the net cost. And the idea is that we can have a net benefit and we can redistribute it amongst the losers. So we take whatever benefit we have to the society as a whole and we redistribute so that overall people are better off. Well then we have a Kaldor-Hicks improvement and we think of that as a welfare improvement.
Let’s look at what is going on in the situation of trade. So we know with trade that there are winners and there are losers. We also know that by the principle of comparative advantage that we’re going to actually have an efficiency gain. So you’re going to have some transfer where American consumers do better off because we have access to goods at better prices. And American producers maybe lose some of their resources because they can’t sell as much to our economy and they have to face a more competitive economy. And then we know that we also have this competitive gain. And if you add up the benefits and the costs you find that, in fact, we have an overall benefit. What we often here when we hear about trade is that it’s a win-win situation.
And what we’re really referring to is the fact that we have a Kaldor-Hicks improvement. Except we as economists understand that there’s one more piece to that – which is that I order for everyone to be better off we really need to find a way to redistribute that income away from the winners and towards the losers so that they’re compensated for their loss.
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