Leaky Bucket Theory

In the Western economics community, Pigou was the first to break the classical economics rule of doing nothing on distribution issues. Traditionally, facing the contrast between the huge social wealth and the serious poverty of the masses, he systematically expressed his concern for economic equality for the first time. In 1920, he published his famous book “Welfare Economics”, which included both equality and efficiency. The perspective of economic analysis. In Pigou’s view, striving for efficiency means allocating resources rationally and increasing national income; striving for equality means transferring part of the income of the rich to the poor to achieve income equalization; only by taking both into consideration can the overall social well-being be improved. Welfare. The rich and harmonious society described by Pigou is undoubtedly desirable, but the problem is that equality and efficiency are often contradictory in reality. Okun once made a very incisive discussion on this issue, which is the famous “Leaky Bucket Principle”.

Suppose there is such a society, where the rich and the poor eat separately. The rich have fewer people and more porridge, and a lot of porridge cannot be eaten, which is wasted; while the poor have more people and less porridge and cannot eat at all. Without fullness, many people have suffered from edema. So the government decided to take a bucket of porridge from the rich’s pot and give it to the poor to reduce inequality. Okun believes that the government’s intention is good, but unfortunately, the bucket it uses has a hole underneath and is a leaky bucket. In this way, when it delivers the porridge to the poor, it will miss a lot on the way. This means that if the government uses taxes to transfer part of the income from the rich to the poor, the poor will actually get less than what the rich lose. For example, if the rich’s income is reduced by 1,000 yuan, the poor may only get 600. Yuan, and the remaining 400 Yuan disappeared. Why does this happen? Because the pursuit of equality damages efficiency, thereby reducing national income. Okun has a famous saying: “When we take a knife and try to divide the national income pie equally between the poor and the rich, the whole pie suddenly becomes smaller.”

The smaller cake mentioned here is actually a loss of efficiency. The main reason is There are two reasons: First, taxes weaken the enthusiasm of wealthy people to invest. In his famous book “Equality and Efficiency: Big Choices”, Okun once wrote: “If taxes have a significant and dominant impact on saving and investment, then in terms of aggregate figures, The evidence will be striking and obvious. In 1929, despite the depression, investment accounted for 16 percent of national income due to low tax rates; after that, federal tax rates rose. By several percentage points, by 1983, even though the economy was in a period of recovery, the investment rate still did not exceed 14%. “Secondly, taxation affected the enthusiasm of labor. Not only affects the rich but also the poor. For example, if an unemployed worker loses all government subsidies because he got a job with a low monthly salary, he will naturally not be enthusiastic about finding a job. In this way, because in the process of income distribution, the total amount of national income available for distribution is reduced, the result will inevitably be the same as a “leakage” in the government’s bucket, causing the rich to lose a lot. And the poor get less.

The leakage principle means that equality and efficiency are “cannot have your cake and eat it too.” So, in this case, which one is more important than the other? Economists, ethicists, and even philosophers have begun their protracted debates. Some people think that the reason why people argue endlessly about the choice between equality and efficiency is that the real world is unequal. The rich want others to lose their vested interests, so they advocate efficiency and oppose equality; the poor want to get something for nothing, so they support equality and criticize efficiency. People are discussing with “colored glasses” and it is difficult to draw a conclusion that is consistent with the true nature of human nature. Therefore, the American philosopher Rawls conducted such a hypothetical experiment in his book “A Theory of Justice”: taking a group of people to a desert island far away from modern civilization and letting them start in the “primitive state” new life. Everyone knows nothing about their future, whether they will be poor or rich, successful or unlucky. Now, let them negotiate together to build a “just” society in their minds. So what is the result of the negotiation? It must be the pursuit of economic equality, rather than allowing the differentiation of rich and poor. Because everyone does not know where their future income will be in the pyramid, if they support efficiency, they will have to bear the risk of starvation. Rawls concluded that between equality and efficiency, equality should take precedence.

However, many people have raised doubts about whether this hypothetical experiment is meaningful in reality. They believe that Rolls’ extremely egalitarian stance is not necessarily the inevitable result of this experiment. In real life, if some people are very talented but they are forced to earn the same income as idiots, then this equality of income is precisely a manifestation of inequality. Milton Friedman worried that the pursuit of equality would undermine sacred freedom. He said: “The modern tendency to use ‘equity’ to obtain ‘liberty’ reflects how far we have strayed from the original intentions of the founders of the United States.” Since fairness lacks an objective standard, he depends entirely on the arbiter. Therefore, “when ‘fairness’ replaces ‘freedom’, all our rights to freedom are in danger.”

Between Rawls and Friedman, Okun takes a more compromise position. In his view, efficiency is valuable, and equality is also valuable. Therefore, no one can choose between the two, and can only find a compromise that promotes equality while minimizing damage to efficiency. For example, narrowing the scope of subsidies and lowering subsidy standards can control the impact of income distribution on the labor enthusiasm of the poor; lowering the income tax rate and raising the consumption tax rate can reduce the damage of income transfer to the rich, etc. Okun specifically pointed out that the root cause of poverty is the lack of education and training, and the most effective way to break this vicious cycle of poverty-bad education-poverty is to open the door to education to the poor population. “There is no greater step on the road to equality than providing thumbs-free public education.”