Pre-Tax Inequality and Distributive Versus Allocative Justice

Thanks to Tyler for linking the pre-tax inequality post below. Not unusually, Tyler’s comments are cryptic but suggestive:

This is all well worth knowing, and it does help counter the view that growing inequality of income is a poliical [sic] conspiracy. But oddly both the critics and the defenders here are missing one major inequality-related difference between Germany and the United States, namely social norms. We have weaker families, weaker social pressures to conform, deeper bayous, and as a result more flat out lunatics, losers, and violent psychopaths. (Did I mention we also have more innovation?) That’s inequality too, though the usual political recipes aren’t likely to provide the cure.

My gut tells me that I agree with Tyler about his conjecture that America has higher variance in sanity, though I’m not sure what to make of this. However, Ryan Avent thinks Tyler’s speaking nonsense:

I can only imagine that he added all that bizarre stuff about bayous to cover the fact that his first sentence makes absolutely no sense at all. If pre-tax inequality isn’t all that unusual in America, relative to similar nations, but income inequality after taxes and transfers is unusual, doesn’t that suggest that the tax and transfer process might be contributing to inequality in a fairly significant way? And mightn’t that be because American tax policies favor the rich to a degree unmatched in other developed nations? How does this, in any way, debunk the notion that political efforts to protect the rich are in fact protecting the rich?

If it helps, here’s what I had in mind while writing the original post: John Rawls’s distinction between distributive and allocative justice.

Nozick had accused Rawls of offering the idea that social justice is a pattern of holdings. However, if people are able to make whatever voluntary exchanges they like, they will constantly disrupt the pattern. And so, if Rawls is right that justice is a pattern, the state will have to constantly interfere with individual’s rights and liberties in order to reinstate the pattern that is constantly ruined by free exchange. There seems to be a conflict between liberty and justice-as-pattern. So said Nozick.

Now, Rawls said that this confused allocative justice for distributive justice — which is what Rawls’s theory is supposed to be a theory of. A theory of distributive justice is a theory about the way the “basic structure” of a society’s institutions distribute opportunities and goods. Once you’ve got the basic structure right, such that the least-well off are generally doing as well as they can given the feasible institutional alternatives, then whatever pattern that emerges from that is fine, more or less. It will not in fact require the constant, meddlesome re-allocation of goods from some people to others.

Rawls likes a system that he called “property-owning democracy” (which I still for the life of me don’t really understand) which he contrasts with what he called a “market welfare state” (or something like that — this is off the cuff). If I remember right, Rawls thought that market welfare states didn’t really fairly distribute opportunities and goods at the level of the basic structure, and substituted tax-and-transfer policies of material reallocation as a kind of pale approximation of the kind of true-blue social justice that comes from getting the basic structure right.

OK! So the reason that graph was interesting to me is that I had a strong sense from reading Rawls and his students that the European social democracies are thought to be much closer to a proper “property-owning democracy” than the U.S. market welfare state, and so I found it telling that the U.S. and Sweden, say, are only negligibly different in terms of pre-tax inequality. For whatever reason, their basic structures are generating similar levels of inequality. And so the difference in final inequality may not so much reflect a difference in distributive justice, in the Rawlsian sense, but a difference in policies of re-allocation, which Rawls did not consider central to justice.

However, reading Tyler’s addendum containing the thoughts of his “very eminent source,” I see the similarities in pre-tax inequality do have quite different underlying causes: in the U.S. people get really extraordinarily rich; in a lot of Europe, a good chunk of the working-age population don’t have jobs at all, and so basically have nothing before transfers. So, in terms of basic structure, it may well be: advantage America! In Rawlsian terms, a basic structure that creates a high ongoing unemployment rate is going to be denying many of the least well-off with “the social bases for self-respect,” one of the most important Rawlsian primary goods.

Now, I understand not everyone (anyone?) shares my special interest in applied Rawlsianism. So, to actually address Ryan’s point, here’s why the pre-tax numbers may seem to cut against a “conspiracy” argument. My original thought was that if greater U.S. inequality was a function of uniquely weak unions, uniquely shifting compensation norms (allowing CEOs salaries to rise, e.g.), uniquely wild superstar markets, uniquely high levels of opportunity hoarding by the already privileged, etc., then U.S. pre-tax inequality ought to stand out more than it does. But since it doesn’t, the relatively high U.S. level of post-tax and transfer inequality is more likely a reflection of the simple fact that high-ish levels of inequality bother Americans much less than it bothers Europeans.

I think the main reason for this, culturally, is that modern Europe emerged from a system of predatory aristocratic privilege and rigid class stratification, whereas the U.S. started out as a relatively egalitarian society. So, to caricature the difference, Europeans see inequality as a sign of intolerable exclusive advantages while Americans see inequality reflecting the fact that some people, who are to be admired an emulated, have made good on the abundant opportunities America affords. If the difference in post-tax-and-transfer inequality simply reflects different cultural attitudes about inequality, then remaining complaints about the relatively high U.S. level of inequality are really just complaint about what Americans believe.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center