Redistribution vs. predistribution

There’s an ongoing debate in left-of-center policy circles between redistribution and “predistribution”, and it’s often framed like this:

The redistribution camp wants to let the market do its thing and then if (when) it creates winners and losers that camp suggests we should redistribute those gains using the tax system and various kinds of spending programs. Doing so would mean getting the best of both worlds, the thinking goes: the efficiency of the market with the welfare gains of redistribution.

The predistribution camp raises a number of objections to this and suggests that instead policy should directly aim to transform the market so that its outcomes are more just, even before taxes and transfers. The predistribution camp has a few different arguments; my list is certainly not comprehensive:

1. Political economy: a society full of rich people will fight tooth and nail against redistribution.
2. Fairness, dignity, and trust: People don’t want to be marked as an economic “loser” and then compensated for it. They want to feel they’ve earned a good living and they will lose trust in a system that doesn’t offer them that.
3. Growth: Markets are highly imperfect and we’re actually leaving growth on the table when we sit back and leave things to “the market”, which is itself highly contingent.

These are good critiques, and I’m quite open to lots of predistribution ideas. The easy response is to say we need some of both.

But I do think this debate can sometimes misunderstand the role of redistribution. Specifically, it misses the sense in which today’s redistribution is tomorrow’s predistribution.

To see what I mean it’s easier to start in a very different context: cash transfers in developing countries. I have no strong view on the efficacy of cash transfers relative to other development interventions; my point is just to note that the argument for cash transfers in this context is that they spark economic development. Here’s economist Chris Blattman, who studies this, in 2013 (if you want more recent information on the effectiveness of cash transfers for development try here):

So how do you create “good” jobs and productive work? Another way of asking this question is “what is holding young people back?” or “what constrains them?”…

More and more, economists think that the real constraint is capital. Studies show that the poor, on average, have high-earning opportunities if they get a little cash or equipment. Studies with existing farmers or businesspeople have seen returns of 40 to 80% a year on cash grants.

This gels with economic theory, which says that infusions of capital should expand people’s choice of occupations, self-employment, and earnings. People can’t get access to that capital through loans because credit markets are so broken and expensive. This can be a development trap, or at the very least a drag on growth.

Redistribution in the U.S. is taking place in a very different context, of course. What’s true in developing countries might not be in developed ones. But when we talk about redistribution’s merits (or lack thereof) in the U.S. we ought to consider its ability to change economic fundamentals. And we have evidence that this sort of thing happens. Welfare state programs — including transfers like food stamps — increase entrepreneurship by helping to de-risk it. Likewise, Raj Chetty and colleagues have demonstrated that the combination of school performance and parents’ income predict the likelihood that a child will go on to file a patent. The “Einstein gap” that Chetty points to is an income gap. It’s at least plausible (if not likely) that if you substantially raised the incomes of parents, their kids’ likelihood of being a (well-compensated) inventor would increase dramatically. Today’s redistribution is tomorrow’s predistribution.

Of course, most left-of-center policy people get all this. And politicians in particular are keen not to pitch redistribution programs simply as static subsidies. Several 2020 primary candidates are doing a good job of proposing redistributive policy ideas in the context of a broader economic transformation. It’s when the more philosophical redistribution vs. predistribution debates get going that the problematic framing I’ve described typically seems to occur.

For example, when we frame the basic income as simply a way to subsidize a permanent underclass in the face of automation or when we treat the welfare state as merely a way to placate those who’ve lost the lottery of winner-take-all capitalism we miss at least part of redistribution’s potential. Transferring money from richer to poorer people changes the economy in important ways, and that’s a big part of its appeal.

That doesn’t mean we should rely solely on redistribution and neglect predistributionist ideas. Many of those ideas are great! And the predistributionists are right to have drawn the lesson that we’ve been too deferential to market outcomes, as if they were delivered from on high. Furthermore, none of what I’ve said addresses the political economy critique that certain market outcomes make certain policy changes harder.

Nonetheless, redistribution should be an important part of any economic policy agenda. And it shouldn’t be framed as simply a static transfer from “winners” to “losers” because that’s not what it is.