Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

If the state got out of the redistribution business

Posted by hkarner - 15. Juli 2017

Date: 13-07-2017

Source: The Economist

Without governments, would countries have more inequality, or less?

Angus Deaton, a Nobel prize-winning economist, explores a question that intrigued him

IF WE were somehow to abolish its government, would America become less equal? Would Britain?

The obvious answer is yes; many see the reduction of market inequality as one of the main tasks of the state in a mixed economy. And indeed, across the mostly rich economies of the OECD, post-tax incomes are more equally distributed than pre-tax incomes.

But this simple understanding is seriously incomplete—both factually, and in its view on the way governments behave.

The standard case, which all economists learn, is that competitive markets are efficient, in the precise but limited sense that in a well-functioning free market it is impossible to make anyone better off without hurting at least one other person. Nothing in this guarantees an acceptable distribution of income; one person having everything can be perfectly efficient.

Markets do not care who gets what. But people do, and they expect their representatives to enact policies that promote fairness.

Governments levy progressive income taxes as well as (rather less progressive) sales or value-added taxes, and they use the proceeds to provide public goods and to finance a safety-net for those with low resources. Governments also legislate to ensure that markets are in fact competitive.

How well do governments do? The OECD estimates that, on average across its members, tax and transfer programmes reduce the Gini coefficient of income (a gauge of inequality) by a quarter.

America is somewhat below the average; Britain is close to it. The US Congressional Budget Office calculates that there is about a 20% reduction in income dispersion between market and disposable income, attributable to transfers and taxes in a 3:2 ratio.

Yet not all governments behave like this. Most poor countries do not. In part, they lack the capacity to make transfers and to collect taxes, especially income taxes. More fundamentally, many governments have no interest in redistribution.

Inequality between the rulers and the rest is not a bug but a feature in a deliberate strategy of exploitation and extraction. This is how colonial powers behaved, and many post-colonial leaders learned the lesson well. I am not sure what the no-government counterfactual would look like for such countries, but these governments are creating inequality, not reducing it.

Surely this is not so in the liberal democracies of the OECD? Yet even there, it is naive to suppose that governments and politicians see their purpose as addressing the failures of free-market capitalism.

Just comparing market and disposable incomes ignores a large part of the story: the effect of government on “market” income itself. As with poor countries, we need an idea of the incentives that politicians face and how they behave in response. Public-choice theory, which focuses on these incentives, poses a major challenge to the model of an ideal state fixing a less-than-ideal market.

Behind on the rent

Different political factions care differently about outcomes like growth and unemployment, and their policies will affect the distribution of pre-tax incomes. Pre-tax income inequality in America has been higher under Republican presidents than under Democrats. Unemployment has been lower and growth higher during Democratic administrations. This may be chance, or due to events outside the control of policy, but perhaps the facts illustrate the point.

Such mechanisms are benign compared with what happens when well-funded interest groups use the state as an ATM to enrich themselves. Such rent-seeking funnels resources upwards, from poor to rich, and blurs any distinction between poor- and rich-country governments. I pick examples from America, where there are many to choose from (rent-seeking is perhaps less developed elsewhere and takes different forms).

The United States spends 18% of GDP on health care yet has one of the lowest life expectancies of any rich country. If spending were reduced to 12% of GDP, in line with France, Germany, or Switzerland, a trillion dollars—$8,000 for every family—could be transferred out of unproductive activities and could supplement median earnings, the stagnation of which owes much to rising health-care costs. Much of that trillion dollars goes to enrich the owners and executives of drugs companies, device manufacturers and relentlessly consolidating hospitals. This rent-seeking is supported by an army of lobbyists: there are more than twice as many lobbyists for the pharmaceutical and health-products industry than there are Congressmen. All of this works to keep prices high, to force the government to buy any drug approved by the Food and Drug Administration, and to fend off the creation of an evaluative agency like Britain’s NICE.

Perhaps the most egregious case today is America’s opioid epidemic, which in 2015 killed 16,000 people from overdoses of prescription drugs, in essence legalised heroin sold as painkillers. The producers of these drugs have made billions of dollars in profits.

Rent-seeking is hardly confined to health care, nor is it always national. Local rules and licences often keep power and money with those who already have it.

At the national level, it is hard for any member of Congress to stand for election without deep-pocketed support, so voters get to choose among candidates whose views coincide with those of wealthy interests. Empirical work shows that legislators vote for the interests of their well-off constituents, not the public at large.

There is little difference here between Democrats and Republicans. The influence of the unions, which used to provide a countervailing force, has waned with their membership and with anti-union legislation.

It is possible that American democracy today has been damaged to the point where it is redistributing up, not down. The libertarian case for small(er) government should not necessarily be thought of as an argument that favours the rich.

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