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Posts Tagged ‘difference principle’

John Rawls contends that inequalities must be arranged so that they benefit the least advantaged members of society. There are real questions about the identity of the least advantaged; income maps tend to show that the least advantaged, in terms of income, are the residents of state mental hospitals. But put that aside. It’s commonly assumed that Rawls’s difference principle favors a European-style welfare state over an American-style economic system. People thus advance Rawlsian arguments for government-run health care systems, increased welfare benefits, and other expansions of the welfare state.

It’s by no means clear, however, that the difference principle favors European-style economies over that of the United States. (I mean the U.S. pre-Obama; we seem to be headed strongly in the European direction.) Let’s assume that someone who is unemployed is better off in the European system. (That may or may not be true, but, for present purposes, let’s just assume that it is.) Game over? Not at all. Unemployment is after all a temporary condition for most people. We must ask, not about the welfare of those who are unemployed, but about the welfare of those who might be unemployed. It would be most reasonable to think of the unemployment rate as reflecting the expected amount of time someone might spend not being able to work.

The unemployment rate in Europe tends to be in the 8-10% range; in the United States, under conditions promoting free-market policies, in the 4-5% range. If chances of unemployment were evenly distributed across society as a whole, then, we would have to calculate welfare by discounting employed welfare by 10% (for Europe) and 5% (for the U.S.)—that is, by multiplying by factors of .9 and .95, respectively—and then adding back amounts representing welfare while unemployed. Since welfare while employed exceeds welfare while unemployed, and since welfare while employed might tend to be higher in the U.S. (due to greater economic growth, lower taxes, etc.), it remains an open question whether people would be better off in a European-style system.

A calculation of that sort, however, actually understates the case considerably. Chances for unemployment are not evenly distributed across society. Suppose that probabilities of unemployment are concentrated in the bottom 25%. Then the difference between 5% and 10% unemployment rates is a difference in discount factors of .6 and .8, not .9 and .95.

To see how this might work out, say that we have the following values for expected welfare under employed and unemployed conditions:

Employed, U.S.                 40,000

Employed, Europe            30,000

Unemployed, Europe        20,000

Unemployed, U.S.            10,000

Expected welfare in a European-style system for people in this group would be .6(30K) + .4(20K) = 26,000. Expected welfare in a U.S.-style system would be .8(40K) + .2(10K) = 34,000. The difference principle, properly understood, would prefer the U.S. system under these conditions.

Say that I’m wrong about employment in the U.S. being more attractive; say its value is also $30K. Then expected welfare in the U.S.-style system is .8(30K) + .2(10K) = 26,000, exactly the same as in the European-style system, despite the fact that expected welfare while unemployed is only half of what it is in the European-style system.

This example is admittedly artificial. But it illustrates a general point. Even on Rawlsian grounds, one cannot compare sets of institutions simply by looking at welfare systems. One has to consider the comparative likelihood of being unemployed and the comparative benefits of employment as well as unemployment for the least advantaged members of society. A free-market system might do surprisingly well in such a comparison.

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