Keep Your Pants On

Current economic theory says that maximizing economic output means that there will be some inequality and that inequality will grow over time. This means that for everyone's wealth to grow in absolute terms, some individuals' wealth must shrink in relative terms. Egalitarians throw up their arms at the thought of allowing this social injustice to exist for the sake of economic efficiency. What an outrage to have a values system based on a math equation!

But here is new theory out of MIT that claims the long-run efficiency maximizing policy requires that we limit inequality through redistribution.

"Werning found that the models at the core of these judgments were incomplete. Allowing inequality to grow, unfettered, is economically optimal only if one looks at just the first generation. His paper shows that the transmission of wealth should be regulated to prevent an accumulation of luck—that children should essentially be insured against the family into which they are born."

Specifically,

“Werning discovered that the best approach would be to encourage parents to leave bequests to their children, and that government should, through subsidies, help the poor pass on money to their heirs.”

If this theory is right, then it is economically optimal to take what A has earned and wants to pass on to her children and give it to B's children. What an outrage! How dare we use a mathematical equation to justify confiscating a person's earnings.

There might be some sarcasm laced in here...I'll leave it to you to guess where. I imagine we could come up with an economic theory that predicted it would be efficiency maximizing for everyone to walk around with no pants on. I don’t know about you, but I intend to keep wearing pants.

HT: Greg Mankiw