A popular story in macroeconomics and broad public economics is that of Okun’s leaky bucket (Okun 1975). This essentially states that we can think of redistributing income like using a leaky bucket to move water – where the loss of income associated with the loss of efficiency is the water that falls out of the bucket on the trip. This gives us our basic “equity-efficiency trade-off“.
Both the Spirit Level and a lot of the “new economics of income inequality” (namely the work on rent seeking) is trying to turn this on it’s head by saying that, not only does the efficiency vs equity/inequality trade-off not exist, but it is often the other way around. When a mechanism is given, which can in turn be tested, I am fine with this (eg I am not discussing the types of studies Offsetting touches on here).
However, when it comes to directly determining policy about redistribution this use of the leaky bucket has stretched the metaphor too far. Policy has more dimensions than a couple of synthetic aggregreates (GDP and inequality measures) which get confused for the much broader terms ‘efficiency’ and ‘equity’. Read more