Great Leap Forward

Predistribution, not Redistribution, is the Way to Reduce Inequality

It is sunday evening and I’m sure that not many of you are reading blogs today, but I just saw a nice article that reports a new study that is probably worth a look. So next week when you’ve got time, read this and download the report that is mentioned: Can We Afford to Wait for Redistribution?   Sunday, 07 July 2013 10:16 .

The report is here. It is by the TUC, which some of you will remember from your labor history classes.

It reaches a conclusion similar to something I’ve been arguing for a long time. I think Progressives are barking up the wrong tree when they approach poverty with the argument that the solution is Redistribution–ie Robin Hood policies that tax the rich and give to the poor. This mixes two memes. Sure the rich have too much income, and sure we ought to relieve them of some. Absolutely. Why? Because they are too darned rich.

And sure we’ve got too many poor people, and too many near poor, and sure wages for at least a third of our workers are totally inadequate. So we need to increase their incomes: wages and welfare.

But do not link the two. That is confusing. We don’t need no stinking taxes on the rich to increase incomes of the poor. Indeed, there is no accounting that allows you to use taxes to take income from the rich to give to the poor. (Despite what our rightwingers say, the IRS does not hold you up with a gun–it debits your bank account.)

Further, it ties poverty relief to a politically very difficult policy–at least in America. Why wait until we can reduce the richness of the rich before we reduce the poverty of the poor? Let us move forward on both fronts–but separately.

I am skeptical that we’ll do much to reduce richness by raising taxes, anyway. In America, it doesn’t work. The rich just get loopholes through Congress to exempt themselves. You can bet that the top 20,000 income earners in America will each get their own personalized exemption to any progressive tax hike. Read the great work by Bartlett and Steele. Never worked in the past, probably won’t work in the future. (Heck, we cannot even tax Apple.)

That is why I think that Predistribution is the right way to go, as the TUC argues. We need to:

1. Prevent the rich from becoming filthy rich. Don’t wait until they are already rich and try to tax it away. Anyone who’s had a baby knows that you keep the candy away from the baby; it is much harder to take it away once it is in the baby’s mouth.

2. Increase income of the bottom half of the population directly: Jobs For All (ELR/JG) and Higher Wages at the Bottom. Don’t try to do it through the tax system.


24 Responses to “Predistribution, not Redistribution, is the Way to Reduce Inequality”

TrixieJuly 7th, 2013 at 11:47 pm

I haven't read the links (shocking, I know), but I don't disagree with the rest of what you say. With the demise of unions though, how do you implement higher wages at the bottom without Congress? Same with the JG. 3 words that scare me the most: Congress must act!

And 3 charts that haunt me (which I don't have links to, so you will have to use your economic imagination):

1. The one showing wages and productivity growth moving in tandem from 1948-1973, and then wages stagnating while productivity growth soars from 1973 on.
2. The other one showing corp profits at record highs while wages at all-time low.
3. And. of course, the wealth distribution chart since 1980 until now. It burns!

All of the above were enabled through active gov policies. Trickle-down and financial deregulation anyone? So how do we reverse it without gov policies? A JG or raising the minimum wage are just as appalling to the GOP as raising taxes on the rich.

PaulJuly 8th, 2013 at 12:23 am

Yep, give more money away as transfer payments and less as corporate subsidies. Increase S/S and extend Medicare to everyone. Make free education available to everyone and provide low-interest loans for housing. Subsidize users of mass-transportation.

At least if we spend money at the lower end of the spectrum the rest of us get a chance at it before the extractors get it.

Ben JohannsonJuly 8th, 2013 at 12:31 am

I think tightening the labor market would help bring down incomes for the wealthy all on its own. The increased wages at the bottom are going to have to come from somewhere. I know that Minsky believed it would be necessary to increase taxes at the top so as to avoid inflation as middle and lower class wages grew, but I'm not sure that applies in our current situation.

L. Randall Wray L. Randall WrayJuly 8th, 2013 at 2:20 am

Ben,Trix,Lake: good comments. Trix, the report DOES advocate policies to support labor unions. (Not surprising given it came from TUC). They also support high employment to increase equality (the Jamie Galbraith argument); note JG/ELR is a high employment strategy. And you can gradually increase the base wage, as Minsky argued. Report also focuses on financialization as a big cause of rising income at the top. Solution: definancialize, of course.

NeilWJuly 8th, 2013 at 6:23 am

I always find it amusing that the current political class always waxes on lyrically about how good competition is – until it gets to competition for labour.

Even competition for labour with something like the Job Guarantee that is designed so that it won't push back.

windrivenJuly 8th, 2013 at 3:43 pm

It is one thing to speak of:

" Increase income of the bottom half of the population directly: Jobs For All (ELR/JG) and Higher Wages at the Bottom."

but quite another to pull it off without distorting the economy in undesirable ways. We function in a world economy and increasing minimum wage sharply simply makes the product of American labor non-competitive in world markets. Generating make-work jobs contributes nothing to wealth creation and little to the workforce thus generated; they understand that their work is, almost by definition, absent of any quality or productivity requirement.

What would help is a long term and well organized public service campaign to educate American consumers of the many benefits of buying goods and services produced by their neighbors rather than cheaper off-shored ones; essentially extending the local sourcing initiative that is beginning to work well in the specialty agricultural segment.

benleetJuly 8th, 2013 at 7:17 pm

University of California professor Emmanuel Saez reports (page 3 of Striking It Richer) that "Top 1 percent incomes grew by 58% from 1993 to 2010 (implying a 2.7% annual growth rate). This implies that top 1 percent incomes captured slightly more than half of the overall economic growth of real incomes per family over the period 1993-2010." During the same 17 year period the lower 99% of households had 6.4% total growth. Minute trickles enriched a small portion of the lower 99%, enormous floods enriched the already rich. — The top 1% in 2012 had more income than the combined income of the lower 60% of households. — Can this go on? I suppose, look at Mexico.

SBGJuly 8th, 2013 at 7:34 pm

The suggestion that the implementation of some huge hand of government that creates policy thar reduces incentives for acheivement is going to solve poverty is absurd. we know the key factors to avoid poverty are completing high school, finding stable employment and having children after being married. Every 10 years those in the highest income sectors change because our system allows for opportunity and doesn't repress it, as this author suggests we should. Instead why don't we incentify the personal responsibility that leads people OUT of poverty and not INTO it. PS … Curious if Economonitor only allows concurring opinions ???

L. Randall Wray L. Randall WrayJuly 9th, 2013 at 1:32 am

Windy: Distorted implies that there is some right way to do markets. All markets are constructed, manipulated, can we say Driven. I don’t buy that there’s anything unique or desirable about the mkt outcome we’ve got.

L. Randall Wray L. Randall WrayJuly 9th, 2013 at 1:36 am

SBGie: I think you’ve wandered onto the wrong blog site. This is not the Austrian anti-pinko&commie&Keynesian site. Yes economonitor does edit comments for content. I don’t see much in yours. We’re looking for relevant comments that actually advance discussion. Here, we actually believe the “huge hand of govt” can be useful. Troll elsewhere. Goodnight and Good luck.

Tomas KurianJuly 9th, 2013 at 9:36 am

Obviously, as employers distribute (in the form of wages) buying power which is inadequate to match aggregate supply (wages + profit), the difference amounting to unspent (uninvested) profits and personal savings.
If this gap is filled by personal loans, it is only temporary fix.
Wage supplements in connection with direct capital taxation provide sustainable solution.

More about it in my work: Genom of capitalism

9. Levels of productivity

16. Periodic taxation of accumulated capital

AllanJuly 10th, 2013 at 3:23 am

Exactly how will you prevent the 'rich' from becoming 'filthy rich' if not by taxation? And at what point does one become the other? It is great to come up with these recommendations, but how do you implement them? Jobs for all? Who is to hire? The government? If increasing the minimum wages actually worked poverty would have been eradicated long ago but obviously it doesn't, and so poverty is still around.
You say "we actually believe the "huge hand of govt" can be useful". I don't think it requires belief; it is useful, the only problem being it is not beneficial to all. There was a time when it was useful to the poor and the middle class who extracted maximum benefits through their unions, but unfortunately for them, govt has now been bought out by the rich via the financial/medical/military/etc. lobbies.
Possibly the root of your (and the world's come to think of it) problems is the destruction of sound money through the manipulation of the central banks.

Dark HelmetJuly 10th, 2013 at 1:31 pm

Why do you care about how rich the rich are? It makes no difference to me if Bill Gates has a thousand, a million or a billion dollars. What we should care about it social and economic mobility. Torturing people who have made it is hardly the way to enhance mobility. And yes, the IRS extracts our taxes by force. If the gun wasn't there, the taxes would not be rendered.

windrivenJuly 10th, 2013 at 2:49 pm

Dr. Wray, I would argue that, if not the 'right' way to do markets, free markets would be the appropriate reference point. Free markets are more a theoretical concept than a practical reality for many reasons not least of which they often include undesirable social consequences.

I deeply share your concern for lower income Americans. But jobs are about more than money. People need to contribute and for their contributions to be meaningful and to be rewarded for their contributions. Simply repackaging the dole addresses none of these greater needs.

Lastly, I certainly agree that there is little desirable to be found in the market outcome we've got. But then I'd also argue that the 'market' has become so gamed and so distorted that it scarcely deserves to be called a market.

L. Randall Wray L. Randall WrayJuly 10th, 2013 at 6:16 pm

Helmet: Exaggeration? Can you provide a list of those–other than gangsters–who’ve faced guns of the IRS? IRS imposes penalties, garnishes wages, and very rarely turns matters over to courts that occasionally send people to prison. You might not care how rich and influential the 1% are, but it is pretty clear that many Americans do–including, increasingly, even fairly conservative pundits.

Peter ShawJuly 10th, 2013 at 7:23 pm

Dr Wray-
I hear your arguments, but respectfully disagree; our memes differ. My economic thinking owes much to MMT writing, but is distinct from it.
I identify three broad classes of tax by function (or meme):
> A property tax – to discourage idle resources;
> A transaction tax – to increase government's purchasing power to parity with the private sector (meaning a producer can strike the same deal with public or private sector);
> An inequality tax – to enable economic activity even in the poorest.
The last can (should?) be different in that all recovered is redistributed, so has a distinct vision.
Developed economies appear to fudge these by undercharging overt transaction tax (an implicit subsidy), then taking the balance with the inequality tax as personal tax.
The disadvantages I see are:
> It is a rather blunt subsidy instrument;
> Personal tax is seen as a dedicated collection activity, so is likely to evolve the properties of a predator;
> The inequality tax is (I thumbsuck) a minor proportion of the top rate, so compromised by tax-avoidance activity which it would not otherwise justify.
A transaction tax is a "producer" tax, so its recovery need not involve the individual taxpayer. Also, I think this is the big one, and the most cost-effective to administer.
If the taxperson you deal with could speak with experience of the "give" half of the transaction, how would you regard them? How would they regard themselves?
If organising personal tax loopholes was hardly worthwhile, would the rich bother?
A VAT of 30-35% appears frightening, but if it is the true cost of government, shouldn't it be visible?
So, I advocate a "Dept of Philanthropy" with sole powers of personal taxation. If current styles of taxation don't work well, shouldn't we try something different and arguably "less confusing"?
To meet your stated objection, there can be the same internal decoupling of tax and spend that already exists in government.

L. Randall Wray L. Randall WrayJuly 10th, 2013 at 8:48 pm

Peter: your thinking might owe much to MMT thinking but you DON’T seem to agree on one of the main ideas: taxes don’t pay for nothing (at the federal govt level) [sorry, edited, left out “don’t”]

Peter ShawJuly 11th, 2013 at 12:16 pm

I tried to express myself carefully to avoid just this distraction. I follow (and agree with) the MMT argument of a real and proper disconnect between taxation and spending.
What I presented is consistent with that:
Transaction tax regulates the private-sector price level (I hope this is correct usage), and so that of the public sector, hence the needed government spending. How that money is made available is irrelevant, and can be MMT-compliant. Within the tax-and-total-spend element, there is no particular need to change the average amount of money in circulation.
So *average* G=T, not as an identity but a measure of success in managing price level.
This is idealised for a steady-state economy. In the real world, there will be additional government spending to compensate for inflation, growth of production capacity and population, and supply investment needs, but I don't think this invalidates my argument.

I note you haven't criticised my tax memes:)

L. Randall Wray L. Randall WrayJuly 11th, 2013 at 1:41 pm

Peter: OK fine so long as you don’t view taxes as “paying for” the spending.
I try not to criticize what I do not follow. That does not mean acceptance. It just means I’m not clear on what you are proposing.

Tyler HealeyJuly 12th, 2013 at 2:06 pm

Since federal taxes don't pay for anything, that means redistribution is not possible at the federal level. Therefore, why raise federal taxes on anyone in the midst of a weak economy?

Ray PhenicieJuly 13th, 2013 at 1:14 pm

I agree with the predistribution theme. In particular:

# Fund schooling at all levels from pre-school to post doctoral and everything in between. No local taxes, no tuition, anyone who wants formal education should have doors open to them to be assigned some education facility that matches their ability and needs.

# Support a mass transit system-we need mass transit systems going up in the 50 largest urban areas today. These would be comfortable, convenient modes that would run at a minimum of 18 hours/day, seven days a week. Oh, and by the way, affordability ($3 tickets for all day rides) would be the way to go.

# Medicare and Medicaid eligibility should be raised so households that have income of less than 300% of the food stamp level (which should be raised to around $36k for a household of four), would be supported thorough a low cost plan. This means deductibles of $250/person, low copays and complete medical and pharmacy coverage. In short, we should look at covering as many folks as possible through some kind of subsidized insurance.

# Real meaning should be given to affordable housing by making that big ticket affordable, this may have to done with a voucher system, not sure. And sigh . . . . yes that includes electricity, running water and heat. Readers of this column might be shocked to know how many folks live in domiciles that have the water, heat, electricity or some or all of those disconnected because of past due amounts on their bill.

If food subsidies were beefed up to the level indicated above then a family of four could live a decent lifestyle on $36k/yr.