The Big Tradeoff averted: five avenues to promote efficiency and equality simultaneously

Abstract

AbstractSociety as a whole faces a host of economic tradeoffs, many of which emerge around economic policies. An example of tradeoffs that any society faces in many economic realms is the tradeoff between economic efficiency and income equality (aka the efficiency-equality tradeoff). This tradeoff has been called “the Big Tradeoff” by the esteemed economist Arthur Okun, who also termed it “the Double Standard of a Capitalist Democracy.” Although the efficiency-equality tradeoff is more or less an inevitable tradeoff in most societal settings and economic contexts, there are still some special circumstances in which this tradeoff can be avoided. This paper identifies five such avenues and elaborates on why and how the tradeoff between these two somewhat contradictory societal goals—efficiency and equality—can be deftly averted under the mentioned circumstances. These avenues with their transformative potential can and should be used so that a capitalist society as an integrated whole can promote both efficiency and equality at the same time under these scenarios and avoid facing the Big Tradeoff in cases where it is evitable. Static and dynamic economic models are developed, solved, and applied to facilitate the articulation and exposition of the main points of each solution with formal rigor and logical coherence. Finally, policy implications are discussed.