What Would a 'Fair' America Look Like?

Why designing a "fair" American economy is so darn difficult.

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Thanksgiving is supposed to be the time when we pause for reflection, at least briefly before plunging into Black Friday. As you look around the table, and perhaps beyond the table, here is a question worth pondering: What exactly would a "fair" America look like?

That may seem like a ponderous question best left to undergraduates debating the meaning of life in a haze of marijuana smoke. But really, the biggest ideological cleavage in this country is about what the relatively rich owe to the relatively poor. With global economic forces pushing up the incomes of the most educated Americans and pushing down the wages of the low-skilled, this issue ain't going away.

Every society has to wrestle with the redistribution issue in one way or another. Switzerland just broached this question explicitly in a referendum that would have capped executive pay at 12 times the level of junior employees. The referendum failed – but 35 percent of Swiss voters said yes.

Redistribution is really at the core of the American health care debate. For all the noise about the dysfunctional exchanges, the personal mandate and President Obama's misrepresentations, the big, hoary philosophical question at the heart of the controversy is the extent to which the healthy and wealthy should be taxed to provide benefits for the less healthy and less wealthy.

[See a collection of political cartoons on the economy.]

I have bad news and good news. The bad news is that the smartest economists in the world can't define what is fair. In fact, I vividly remember a Nobel Prize-winning economist at the University of Chicago explaining that there is no economic tool to prove that forcibly taking one dollar from Bill Gates and giving it to a starving homeless person would make society better off overall. We may believe that the homeless guy will benefit more from the dollar than Bill Gates will miss it, but we can't prove it. In the end, it's a philosophical question.

Now the good news. There is at least some economic insight to help us navigate the inequality challenge, namely that it is hard to have a big pie and divide it evenly, too. The policies that promote innovation and hard work tend to lead to more inequality. When the rewards are big, we work harder. That is human nature. And when the rewards are gigantic – as is increasingly the case in our globalized economy – then the winners are going to do very well relative to the losers. That's why we try to "win." And the losers, well, they end up with little or nothing, as anyone who has lost a job to China will tell you.

Meanwhile, policies that "spread the wealth" can guarantee some pie for everyone, but they also tend to generate less pie overall. This is human nature, too. The more benefits we guarantee for everyone, the easier it is to live off the work of others. Generous unemployment benefits lessen the pain of being out of a job, and they create less urgency to find a new one.

Let me put some numbers against this basic tradeoff. France would reasonably be considered a country that puts a lot of effort into offering some pie to everyone. Americans tend to care more about baking a big pie, with mounds of whipped cream and chocolate shavings. GDP per capita in the United States is $50,700. GDP per capita in France is $36,100.

[See a collection of political cartoons on the budget and deficit.]

But the size of the slices matters, too. According to the OECD, 21 percent of American children live in poor households, compared to 8 percent of French children.

Sure, there are better and worse ways to redistribute. A more efficient American tax system (e.g. one that leaned more heavily on taxing pollution rather than work and investment) would take less of an economic toll for every dollar of revenue collected. And a more thoughtful social welfare system (such as targeted preschool education for children in poor families) could make a lot of Americans better off at little or no cost to society in the long run. The Scandinavian countries have done a darn good job of creating wealth and sharing it too.

There is some emerging evidence that extremely high levels of inequality may harm economic growth, but the basic tradeoff will never go away entirely. Liberals need to recognize that if you want bigger slices for everyone, the pie will tend to be smaller than it would be otherwise. Conservatives must acknowledge that if you want the biggest pie possible, the gap between the largest and smallest slices may be uncomfortably large. A significant proportion of people will lead squalid lives in an otherwise rich country.

[Read the U.S. News Debate: Should the Supreme Court Uphold Personal Limits on Campaign Contributions?]

That brings me to the philosophy part. To my mind, the best way to think about the fairness conundrum is the "veil of ignorance," which philosopher John Rawls made most famous. The idea is that a "fair" society is the one you would design if you didn't know what position you would occupy in that society.

Suppose you were to be born tomorrow into a random American household. You could end up in a single-parent family in a Chicago housing project or in supportive middle-class family that has already taped flashcards to the side of your crib. If you were uncertain if you would be a winner or loser in the American birth lottery, how much wealth (both yours and society's overall) would you be willing to give up in order to protect against the worst possible outcomes?

Clearly, this is not a perfect definition of fair. It is a thought exercise with no application in practice – but certainly worthy of discussion over a holiday designed to give thanks. Have a good Thanksgiving.

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