A LIBERAL ECONOMIST'S CASE Princeton's Alan Blinder is always fun to read, believe it or not, and up to a point quite persuasive.
By DAVID R. HENDERSON DAVID R. HENDERSON, formerly a senior staff economist with the Council of Economic Advisers, now teaches in Monterey, California.

(FORTUNE Magazine) – Among economists who are also political liberals, Alan S. Blinder is one of the brightest and most appealing. A professor at Princeton, Blinder happens to be a great writer. People with little or no grounding in economics can easily + follow the arguments of his latest book, Hard Heads, Soft Hearts (Addison- Wesley, $17.95), and will learn a lot. Blinder lays out the principles of economics cleanly, crisply, even wittily. His title reflects the view that economic policy should combine clear thinking and compassion for the poor. In judging economic policy proposals, he advocates two tests: Will the policy increase efficiency (thus raising living standards), and will it redistribute income down the ladder rather than up? Take protectionism. Blinder's chapter on the subject is one of the best statements of the case for free trade I have ever read. He argues persuasively that protectionism fails both his tests: First, by increasing consumers' costs, it works to reduce living standards. Second, it redistributes income from consumers to shareholders and workers. Critical detail: In just about all industries, shareholders have a higher average income than the consumers who are being forced to pay higher prices for protected goods. And in many protected industries, including steel and autos, the workers too earn well above the average. In brief, the first effect of protectionist policy is to transfer income from the relatively poor to the relatively rich. Blinder's chapter on environmental policy makes a case for taxing corporations that pollute rather than simply banning emissions. The tax approach is unpopular with many environmentalists, who revile the taxes as ''licenses to pollute,'' but Blinder shows you how the approach provides cleaner air at lower cost. Case in point: a study of the St. Louis area showing that a local paper products factory could cut particulate emissions by one ton for a cost of only $4, while a brewery in the area would have to spend $600 to get the same reduction. Forcing everyone in the area to cut pollution by one ton would, of course, cost the two companies a total of $604. Blinder shows why it's possible to get more pollution reduction a lot cheaper, simply by imposing a tax of, say, $100 a ton. To avoid the tax, all companies that could cut emissions cheaply would immediately rush to cut back by many tons. Companies like the brewery would elect to pay the tax, but in the aggregate there would be less pollution, and the cost of getting rid of it would be minimized. Blinder cites estimates that the U.S. now spends $70 billion a year on reducing pollution and suggests we could achieve the same effect for a lot less (perhaps as much as $50 billion less).

WHEN HE TALKS ABOUT protection and pollution, Blinder offers proposals that would reduce regulation or at least make it less intrusive. Perhaps you are wondering at this point whether Blinder is really a liberal. He is, but the issues we have been talking about do not tend to divide economists: Just about all of them agree on those issues. What makes Blinder distinctly liberal is his belief in activist government policy to maintain the economy at full employment and his commitment to redistributing income from the relatively wealthy to the relatively poor. I found his proposals less persuasive in these areas. In discussing employment and inflation, Blinder says we worry too much about inflation. He estimates that for every percentage-point reduction in the inflation rate, we must accept a two point or so increase in the unemployment rate for one year. Blinder says that is too high a price to pay, and launches into an argument about the true cost of inflation, which, he says, noneconomists tend to exaggerate. If inflation is running at an 8% rate while real wages are rising by 2%, people's money wages will increase by 10%. The noneconomists among them will attribute the whole 10% gain to their own increased productivity and will feel that inflation robbed them of the other 8%. They weren't robbed at all, Blinder argues: 2% is all they were entitled to, and 2% is what they got. That argument is incomplete, however. Before 1985 people were being robbed because individual income taxes were not indexed: Inflation kept bumping people into higher marginal tax brackets, thus enabling the Treasury to steal some of the income they were entitled to. Blinder acknowledges this difficulty and says at one point that a failure to index the tax system can impose ''sizable costs.'' But then he turns around and says that unless you are an economist or accountant, this cost will ''leave you yawning.'' Where was Blinder during the late 1970s? I knew people with only a high school education who noticed instantly that an 8% increase in their hourly rate translated into only a 6% or so increase in their take-home pay, not enough to stay abreast of inflation. They didn't yawn when that happened -- they got mad, which is one reason taxes ended up being indexed. Those who minimize the effects of inflation must deal with another issue. It may be true that people would adapt to a constant rate of inflation, and that (assuming we retain tax indexing) its effects would be minimal. But many people, including me, fear that inflation tends not to remain constant -- that the rate will accelerate, and that rising and unstable rates of inflation increase risks for investors, which is plainly bad for the economy. Blinder agrees that accelerating inflation could be a serious problem but argues that ''there is neither theoretical nor statistical support for the popular notion that inflation has a built-in tendency to accelerate.'' The statement is correct -- but for an ironic reason: When inflation looks as if it's getting out of hand, some leader like Reagan or Volcker is apt to come along and fight it. This would be contrary to Blinder's advice: He advocates ''running the economy at peak levels'' and accepting whatever inflation develops. But since (as Blinder agrees) the inflation-unemployment trade-off is strictly a short-run phenomenon, the only way to keep unemployment down in the long run is to accept steadily increasing inflation. If he had his way, inflation would have a built-in tendency to accelerate. ONE REASON FOR the counterrevolution against activist government policy to combat unemployment is that many economists doubt that government can move quickly enough to implement such policies. For openers, they doubt that the policymakers are likely to see a recession coming. Once it is visible to officials at the Fed and the Treasury, they have to lobby Congress to increase spending or cut taxes. By the time Congress is persuaded, the recession might be well under way. And since all fiscal policies operate with substantial time lags, the effects might not be felt until the recession is ending. As Martin Feldstein put it when he headed Reagan's Council of Economic Advisers, one of the best leading indicators of a recovery is a new jobs bill in Congress. I was also unpersuaded by Blinder's basic argument for the redistribution of wealth. His case is a familiar one: that a poor man values a dollar more than a rich man. And so, argues Blinder, it is ''but a short hop'' to the conclusion that government must redistribute income from rich to poor. But that's not a short hop at all -- it's a huge non sequitur. If Blinder had two students, one with a grade-point average of A and one with an average of C, and if he were convinced that the C student valued high grades more than the A student did, would he ''redistribute'' grades from the A student to the C student? I doubt it. I suspect that Blinder would view any such redistribution as unjust and would argue that the A student earned the grade while the C student did not. Why doesn't similar logic pertain to people who earn high incomes? I'd be curious to hear Blinder's answer.