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Government Redistribution

Views about fairness are important because a major function of present-day governments involves changing the distribution of income from what the market would give. One reason why governments take from some and give to others is that the unmet goals of some, the needy, are deemed more important than the met goals of others. When people support policies that alter the distribution of income, politicians will respond by enacting them.

Another reason for government redistribution is that the government can act as an insurer against a variety of misfortunes. Problems of screening (adverse selection) or moral hazard may make market provision of some insurance unfeasible. The government may respond by providing this insurance. A program to aid the poor, for example, can be seen as part of a safety net that insures all citizens against dire poverty. Because it is unlikely that anything remotely similar could be provided by the market, the insurance aspect of redistribution greatly increases its political appeal.

Desires to help the needy and to insure ordinary citizens against misfortune are often used to justify the extensive redistribution governments undertake. However two negative aspects to redistribution suggest we should be careful in how much redistribution we undertake. The first is that transfers change the incentives in a market system, tending to encourage nonproductive activities and discouraging productive ones.

The title of Arthur Okun's book, Equality and Efficiency: The Big Tradeoff (The Brookings Institution, 1975) captures the essence of the first problem. Okun, who was close to an egalitarian position, recognized that government policies that reduced income inequality could reduce total production. If the government tried too hard to take from the rich to help the poor, the rich would react by changing the way in which they used their resources, and some of the new ways would not be productive. Hence, trying to divide the pie more equally could shrink the size of the pie. In addition, economic growth depends in part on decisions that are very risky. If there are only small potential rewards for those who take the risks of innovation, people will stick to the tried and true and economic growth will slow. The problem for government policy in this view is to find the proper balance between income redistribution on one hand and production and economic growth on the other. Okun was willing to suffer a considerable reduction in efficiency in order to obtain greater equality.

Charles Murray developed a pessimistic view of the trade-off problem in his Losing Ground: American Social Policy, (Basic Books, 1984). Murray relied on the idea of moral hazard to argue that the many transfer payments of the welfare state in the United States have increased poverty. If poverty becomes attractive because the government pays well for it, it becomes more common. Murray's contention that there is little room to trade off equity and efficiency is controversial. Continued study of the extensive programs of government redistribution that most industrialized nations have adopted should eventually show him right or wrong.

The second negative aspect of redistribution involves political incentives.

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Copyright Robert Schenk