40 years after Arthur Okun’s “Tradeoff,” the classic book still has lessons for tackling inequality

“The stakes in economic policymaking are enormous. Economics is not physics—economic theories do not just describe the world—they can change it.”

So wrote former Treasury Secretary Larry Summers in his opening remarks (PDF) for an event at Brookings that marked 40 years since the Brookings Press first published “Equality and Efficiency: The Big Tradeoff” by celebrated economist Arthur Okun. Okun came to Brookings after serving as an adviser in the Kennedy and Johnson White Houses and, in 1970, co-founded with George Perry what is still among the world’s most prestigious economics journals: The Brookings Papers on Economic Activity. Okun made many contributions to the world of macroeconomics, but what he surely never anticipated was the decades of impact 1975’s “Tradeoff” would have on generations of economists.

In April the Brookings Press released an updated version of Okun’s book, complete with a new foreward by Summers, now president emeritus of and a professor at Harvard University. The updated text is the third in a new series from the Brookings Press called the Brookings Classics that aims to make groundbreaking theories and findings from decades past accessible to new generations of students, thinkers, and policymakers.

“I was always very interested in poverty, and when I read this book it was like lightbulbs went off,” said Hamilton Project Director Melissa Kearney at the event. The book, she continued, “was tremendously clear and honest about the tradeoffs and how we can address poverty in this country and yet still foster economic growth and productivity…I’ve been pushing this book on my students for over a decade.”

And she’s not the only one. The book has become a must-read text for any serious economist—or any person seriously interested in economics.

Does Okun’s tradeoff still apply in today’s time of rising inequality?

The central theme of Okun’s book is now an economics catch-phrase: The market needs a place, and the market needs to be kept in its place. That theme is as relevant today as it was 40 years ago. Rising inequality begs answers to critical questions about what role economic policies—for example tax and transfer policies or tax credits for low-income Americans—can and should play in combatting broadening gaps in income inequality. In “Tradeoff,” Okun writes:

“Contrast among American families in living standards and in material wealth reflects a system of rewards and penalties that is intended to encourage effort and channel it into socially productive activity. To the extent the system succeeds, it generates an efficient economy. But that pursuit of efficiency necessarily creates inequalities. In hence, society faces a trade-off between equality and efficiency. Tradeoffs are the central study of the economists. You can’t have your cake and eat it, too, is a good candidate for the fundamental theorem of economic analysis. We can’t have our cake of market efficiency and share it equally.”

As economists continue to publish serious research aimed at tackling inequality through economic policy, including Thomas Piketty’s bestselling “Capital in the Twenty-First Century,” burgeoning economic thinkers can revisit Okun’s classic text for answers and to ask: Was he right? Do we have to choose between equality and efficiency? And if we do, how much should economic policy favor one over the other?

At a Brookings event on May 4, 2015, a panel of experts had a spirited debated about the application of Okun’s tradeoff theory in today’s modern economy.
Watch the debate here (it starts at the 43-minute mark after personal reflections on Okun’s legacy and his book from George Perry and Larry Summers):

Facts about today’s economy that few, including Arthur Okun, anticipated:

As the debate at Brookings illuminates, and as Larry Summers states in his introduction to the reissued version of the book, “much has happened in the last four decades that Okun did not and probably could not have anticipated.”

Summers continues with an examination of five current economic realities that few economists could have anticipated in 1975. As economists and policymakers ponder the best way to tackle these issues and others, we might all do well to ask ourselves, as Larry Summer admits to doing, “What would Okun say?”

1. Productivity growth has slowed and median family income has been minimal since the mid-1970s.
   When “Equality and Efficiency” was published, productivity growth had supported steady increases in median family incomes and reductions in poverty for more than a generation.
2. The U.S. income distribution has become increasingly unequal.
   At the end of the 1970s, 8 percent of income belonged to the richest 1 percent. Today, 20 percent of income does.
3. The U.S. economy is open to global markets in a way Okun never accounted for.
   In 1979, total U.S.-China trade was $2 billion. In 2013, it totaled $562 billion.
4. A very small minority of Americans have made overwhelming outsized economic gains.
   In 1965, the ratio of CEO compensation to the compensation of the average worker was 20:1. Today it’s 331:1.
5. The economy is more fluid.
   With fewer complex supply chains to rely on, American companies 45 years ago could never have achieved the short-term, massive success of companies like Google, Facebook, and Amazon.

Concluding his introduction to the book, Summers writes that Okun, had he lived past 1980, “would have been prepared to amend his views in the face of new evidence and to propose novel solutions to emergent problems…We will never know all that Okun could have taught us. But it is a tribute to his humane wisdom and deep seriousness of purpose that this book, while topical four decades ago, repays study today. I hope and expect that this new edition of ‘Equality and Efficiency: The Big Tradeoff’ will inspire young economist as much as it inspired me forty years ago.”

Listen to David Wessel’s take on Okun’s book, and his four gleanings from the recent event: