ECONOMISTS have two contradictory impulses when analysing policy. The first is to ignore its effects on the distribution of income or wealth, and argue that policymakers should shoot for efficiency and worry about redistribution later. This instinct often surfaces in discussion of policies like carbon taxes. These increase efficiency by raising the price of pollution, a harmful activity that, without intervention, comes too cheap for the polluter. But carbon taxes tend to hit poorer people, who spend a higher fraction of their income on fuel, the hardest. We should introduce the tax anyway, economists say, and re-distribute by other means.  

This first impulse is loosely based on the “fundamental welfare theorems”, which say that whatever the initial distribution of wealth, trade will lead to an efficient outcome. The best way to redistribute is not to interfere with trade, but to divvy up “endowments”—peoples’ initial wealth. On this view, inequality can be dealt with in isolation, after figuring out how best to lubricate markets.

The second, opposing impulse, which is on display in many DC think-tanks, is to...Continue reading