Inequality and Spending Policy

Reformers often argue that the welfare benefits of ameliorating inequality are worth the cost in reduced economic efficiency that supposedly results from associated increases in government spending. This paper argues that these arguments are mostly misguided. Focusing solely on the marginal benefit of government- versus private-sector spending, there is ample reason to conclude that many governmental expenditures directed to reducing inequality are justifiable on the basis that they improve overall efficiency, even as they also reduce inequality. Because the efficiency argument directly addresses the concerns that otherwise animate restraint in redistributive programs, treating the reduction of inequality as a tradeoff against efficiency losses that is otherwise worthwhile is mostly counterproductive from a social policy perspective. Reformers instead should engage proponents of economic efficiency on their own terms.

In making this argument, the paper also develops the concept of “budget policy endogeneity,” or the idea that the affordability or not of various programs must take into account the allocative and distributional effects of current spending on future wealth, since revenue for current projects may be raised in the future. If current spending enhances allocative efficiency, programs that can only be funded with borrowing today create the conditions for their relatively less burdensome repayment tomorrow.