The problem of upward redistribution

|The Volokh Conspiracy |

Political scientist Steven Teles has an insighful article in National Affairs, focused on the problem of upward redistribution of income by the government. As he points out, there are many government policies that essentially redistribute wealth from the poor to the rich, rather than vice versa:

America today faces two great challenges. First, the explosion in inequality threatens the public's belief in the justice of our economic system. Second, the slowdown in the formation of new businesses, a key metric of economic dynamism, endangers economic growth and employment. The solutions to these problems are usually in tension with one another - greater inequality is often the price of economic growth….

At the same time, however, we have seen an explosion in regulations that shower benefits on the very top of the income distribution. Economists call these "rents," which we can define for simplicity's sake as legal barriers to entry or other market distortions created by the state that create excess profits for market incumbents….

A focus on rents points us to the role that state action plays in the increase in top-end inequality and suggests that preventing the further entrenchment of plutocracy must have a deregulatory component…. This suggests that conservatives ought to be more concerned about top-end inequality and that liberals ought to be more supportive of certain kinds of deregulation. Indeed, it suggests some real room for agreement where so far we have tended to see only political conflict.

Among the upwardly redistributive rent-seeking policies that Teles focuses on are restrictive zoning, which increases the cost of housing for the poor and lower middle class and cuts them off from job opportunities, and occupational licensing, which increases the cost of professional services, while simultaneously restricting job opportunities for the less affluent. To this list, I would add "blight" and economic development takings, which often forcibly displace the poor and the politically weak for the benefit of powerful interest groups and politically connected developers, such as Donald Trump.

I agree with much of Teles' argument. He is right to point out that these forms of upward redistribution cause great harm. He is also right that the left and right should unite to oppose them. To some extent, this has already happened. Leading liberal commentators, such as Paul Krugman and Matthew Yglesias, has called for the end of restrictive zoning. The liberal Brookings Institution has advocated curbing occupational licensing (a cause long espoused by free market advocates on the right). The NAACP and Ralph Nader have joined with libertarians and others in seeking to end economic development takings.

I. Understanding the Problem

Nonetheless, I have reservations about both Teles' formulation of the problem, and some of his proposed solutions. On the former front, I do not think that inequality is the real issue. Rather, the problem is that these policies undermine both freedom and social welfare. If restrictive zoning or widespread occupational licensing substantially benefited both the affluent and the poor, they would not be so objectionable—even if they benefited the former more than the latter, and thereby increased inequality. While we should seek to increase freedom and happiness, and reduce poverty and suffering, there is no good reason to object to economic inequality, as such.

More importantly, Teles' account of the reasons why these harmful policies became so entrenched is incomplete. He focuses primarily on the superior organization and political influence of the narrow interest groups that benefit from them. He also notes that "[m]any of the most powerful forms of upward-redistributing rent-seeking take place in obscure decision-making contexts." But that does not sufficiently explain their persistence. If, as Teles argues, upwardly redistributive policies harm the vast majority of the population for the benefit of a few narrow interest groups, why don't voters simply get rid of them by voting out politicians who keep them going and electing replacements committed to better policies? Even if the relevant policies are initially "obscure," why do they remain so for long periods of time? The missing variable is widespread political ignorance. Most voters quite rationally pay little attention to the details of public policy. Many are largely unaware of even the very existence of many of the policies Teles discusses.

Many of those who are aware don't study them closely. As a result, they overlook their harmful effects, many of which are counterintuitive to people who haven't thought carefully about the issues, or do not understand basic economics. For example, voters in liberal cities tend to support restrictive zoning, not because they want to stick it to the poor, but because they probably don't realize its impact on the availability of affordable housing.

Both voter ignorance and poor analysis of the information they do know are particularly common in a world where the functions of government are many and complicated. Even relatively sophisticated voters can't keep track of more than a fraction of the many activities of the modern state.

II. Why Technocratic Fixes Probably are not the Right Solution.

This incomplete diagnosis of the problem may lead Teles to advocate a flawed solution. In most cases, he hopes to address the issue either by mobilizing opposing interest groups or by giving seemingly impartial experts greater control over the relevant policy, thereby insulating them from interest group pressure. Neither of these technocratic solutions is likely to work well in a world of severe public ignorance. It is difficult to keep rationally ignorant voters mobilized to keep watch over a wide range of issues over a long period of time. Even if they can be temporarily aroused because of some particularly blatant abuse, public attention is likely wane before long, moving on to other issues.

Unless carefully monitored by voters, supposedly impartial experts can easily become a powerful interest group in their own right, with agendas and interests inimical to that of the general public. Moreover, even those government-appointed experts who genuinely try to pursue the public good often suffer from their own forms of ignorance. Some of the agencies Teles lauds as exemplars of effective, disinterested expertise actually exemplify these very pathologies. For example, the Consumer Financial Protection Bureau has enacted a variety of regulations that harm the very consumers it is supposed to protect.

The better strategy for combating upward redistribution is to eliminate or cut back on the role of government in the relevant policy areas. This is how most previous victories against rent-seeking have been achieved, such as the deregulation of airlines and trucking. It is also how the movement to curb economic development takings has achieved a measure of success in recent years. It is much easier to abolish or severely curtail harmful government intervention than to establish effective mechanisms for constantly monitoring it.

Teles hopes that influential foundations and donors might be induced to fund opposition to upwardly redistributive policies. If such philanthropists do decide to become involved, they would be better advised to fund efforts to abolish these policies, rather than merely try to monitor and restructure them.

I raised similar objections to Teles' insightful earlier article on the dangers of "kludgeocracy" in government. In that instance, too, he identified a serious problem that can be more effectively combatted by reducing the role of government than by the more technocratic fixes he proposes.

That said, upward redistribution is a complex, multifaceted problem. There is probably no one solution to it that will work in all cases. Those who seek to curb it should consider a variety of strategies. As a start, they would do well to consider Teles' thoughtful analysis.