The Corner

Economy & Business

What Charles Schultze Said

(Lucas Jackson/Reuters)

I agree with almost nothing in this New York Times essay by Binyamin Appelbaum: not with the fairness of the generalization that “economists” cheerlead for lower taxation of the wealthy over the last generation, not with the claim that falling life expectancies of late are an obvious indictment of U.S. economic policies, not with the conclusion that “[r]educing inequality should be a primary goal of public policy.” But perhaps the book from which the essay was drawn will make a strong case for all of this.

Here I want to examine one of the smaller building blocks of the essay. Appelbaum writes:

Liberal and conservative economists conducted running battles on key questions of public policy, but their areas of agreement ultimately were more important. Although nature tends toward entropy, they shared a confidence that markets tend toward equilibrium. They agreed that the primary goal of economic policy was to increase the dollar value of the nation’s output. And they had little patience for efforts to limit inequality. Charles L. Schultze, the chairman of Mr. Carter’s Council of Economic Advisers, said in the early 1980s that economists should fight for efficient policies “even when the result is significant income losses for particular groups — which it almost always is.” A generation later, in 2004, the Nobel laureate Robert Lucas warned against any revival of efforts to reduce inequality. “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”

When I read that passage, it seemed to me likely that Schultze had not been writing about inequality at all. He was probably, I figured, writing about policy changes that have widely distributed benefits and concentrated costs. Sure enough, that’s what I found. The quote comes from Schultze’s 1982 essay, “The Role and Responsibilities of the Economist in Government.” Schultze wrote:

What I am saying is that in matters of specific micro policy, and within reasonable bounds, [the economist’s] role is to be the partisan advocate for efficiency even when the result is significant income losses for particular groups — as it almost always is. The equities at stake are not grand matters of progressive taxation, or welfare reform and the distribution of income by income class. Rather, distributional issues center on the inevitable losses in income suffered by some members of society — often rich and poor alike — as the result of choosing an efficient solution (emphasis in original).

Schultze then offers two examples: “highly-paid” steel workers who will lose income because of free trade and Maine homeowners who will pay more for heating because of energy deregulation. A few paragraphs later, Schultze added that while the economist’s concern for efficiency should “be vigorously represented in the advocacy process by which policy is formulated, it is not the only legitimate point of view.”

The comment does not appear to betray any impatience with “efforts to limit inequality,” and was entirely compatible with support for a robust program of redistribution and progressive taxation to limit inequality.


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