Lawrence Summers

Focus on equality of opportunity, not outcomes

Lawrence Summers
Jul 15, 2012 21:52 UTC

Even if the process of economic recovery proves protracted, the American economy will eventually recover, and cyclical issues will cease to dominate the economic conversation. It is likely that issues relating to inequality will move to the forefront. There is no question that income is distributed substantially more unequally than it was a generation ago – with those at the very top gaining share as even the upper middle class loses ground in relative terms. Those with less skill, especially men who in an earlier era would have worked with their hands, are losing ground, not just in relative but in absolute terms.

These issues frame an important part of the economic debate in this election year. Progressives argue that widening inequality jeopardizes the legitimacy of our political and economic system. They contend that at a time when the market is generating more inequality, we should not be shifting tax burdens from those with the highest incomes to the middle class, as has taken place over the last dozen years. And while they recognize that Steve Jobs earned his billions providing great value to consumers and making a substantial contribution to the American and global economies, they also point out that the social value associated with the activities giving rise to many other fortunes, especially in the financial sector, is less apparent.

Conservatives argue that in a world where everything is increasingly mobile, high tax rates run more risk of driving businesses and jobs overseas than they once did. They point out the central role of entrepreneurship in advancing economic growth and note that since most new ventures fail, the returns of success have to be very large if entrepreneurship is going to flourish. They take umbrage at the suggestion implicit in some political rhetoric on inequality that there is something wrong with success on a grand scale. And they worry that policy measures taken to directly combat inequality will have perverse side effects.

Unfortunately, the points on both sides of the argument have considerable force. While I support moves to make the tax system more progressive, the reality is that inequality is likely to remain high and rising even in the face of all that can responsibly be done to increase tax burdens on those with high income and redistribute the proceeds. A variety of measures such as allowing unions to organize without undue reprisals and enhancing shareholders’ role in setting executive pay are desirable. But they are unlikely even to hold at bay the trend toward increasing inequality.

Where does this leave the public policy agenda? The track record around the world of populist policies motivated by inequality concerns is hardly encouraging. Equally, passivity in the face of dramatic economic change is unlikely to be viable. Perhaps the focus of debate and policy needs to shift from a focus on inequality in outcomes, where attitudes divide sharply and there are limits to what can be done, to a focus on inequalities in opportunity. It is hard to see who could disagree with the aspiration to equalize opportunity or fail to recognize the manifest inequalities in opportunity today.

Time nears for an American tax overhaul

Lawrence Summers
Feb 26, 2012 22:35 UTC

However the U.S. presidential election turns out, the trifecta of the Bush tax cut expiration, the debt limit ceiling on the horizon once again, and the Congressionally mandated sequesters – cuts in domestic spending – will force the president and Congress to wrestle with fiscal issues either in a lame duck session after the election or in early 2013. The decisions they make will have profound impacts on America’s fiscal future.

For many observers, the central question on the table is about entitlement programs: What will be done with them? Growth in entitlement spending associated with our aging population and its rising health care costs is the major factor in overall federal spending growth. But the capacity of near-term policy changes to have large impacts on that spending is less than many would suppose. The rising ratio of retirees to workers means that Social Security benefits at current levels will not be sustainable without some kind of tax increase. Sooner or later, revenue will have to rise or else outlays will have to be curtailed. While it is surely better to act sooner, the reality is that, out of necessity, action on entitlements is inevitable.

While almost everyone agrees on the desirability of containing federal health care spending, this is likely to be more difficult than we’d like to believe. Certainly beneficiaries can bear more of the cost of their government insurance than others, and there are steps like malpractice reform and the further encouragement of preventive medicine that should be taken. Yet without intrusions into the private health care system that are unlikely to be politically acceptable, there are severe limits on what can be done. Otherwise the result will be unacceptable cuts in the availability of care for the clients of federal programs. Given all the uncertainties associated with new technologies, changing lifestyles, and ongoing changes in the private system, health care reform will and should be a continuing project.