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.
Copyright Robert Schenk
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