The Error of Productributionism

Good stuff from Phillip Whyte:

Many Europeans believe liberal economic reforms are incompatible with social justice. The US and the UK, they point out, have more liberal markets for products and labour than in continental Europe – but also higher levels of poverty and income inequality. European countries therefore face a choice. They can either free their product and labour markets and accept the downsides or they can protect social solidarity by resisting Anglo-American neo-liberalism.

But the belief that market liberalisation increases social inequalities is not borne out by the evidence. The UK certainly has higher levels of poverty and inequality than France or Germany. But pointing this out is just selective use of evidence to support a predetermined conclusion. If there were a strong correlation between levels of market liberalisation and social outcomes, one would expect to see the pattern replicated across the European Union – not just in a carefully selected group of countries.

Is such a pattern discernible? No. The nation with the lowest levels of poverty and income inequality in the EU, as well as the lowest rate of long-term unemployment, is Denmark – a country with competitive product markets and some of the least restrictive labour laws. Countries with the worst social outcomes (Greece, Italy and Portugal) all have restrictive product and labour market laws. Liberalisation, it seems, no more threatens social justice than regulation guarantees it.

The following isn’t what this column is about, but it’s what it made me think about.

The structure and regulation of an economy is conceptually separable from tax and transfer policy. Of course, it is really all one system, and taxes and transfers affect economic performance by affecting labor supply, etc., but this is relatively distinct from the body of law that defines the parameters and rules of the economic game. You could in principle have buck-wild laissez faire together with fairly high taxes and lavish social insurance. Nobody does do this, exactly, but it’s possible. Optimize the basic economic structure for maximizing wealth creation, not for creating a pattern of distribution, and then use the political institutions to take care of redistribution after the wealth is created. Because then there will be more wealth.

Nevertheless, there persists a very strong impulse on all sides to think that if you care about distribution, then you’re going to want to try to rig the basic economic-regulatory structure to produce the favored pattern of distribution. That’s a big mistake. But, anyway, people who want to do something about broadening access to health care, say, end up mucking around with markets in insurance and health services until they don’t really function as markets at all. And then they use that as some kind of evidence of “market failure” and plump for eliminating the market altogether. That’s a bad way of realizing the original distributive goal.

So why won’t distributive tweaking of productive institutions go away? I think we get so much of this in part because rigging the system to approximate a pre-determined distributive pattern is less transparent, meaning that those who are being implicitly subsidized don’t so much feel like it. They don’t suffer the stigma of an explicit transfer. But is that really worth a reduction in the amount of the transfer relative to the grow-then-distribute world? Well, some people say, this may not be a reduction all, because people are greedy bastards. It’s not only the implicitly subsidized who are tricked by implicitness, but also those implicitly taxed. They’d more vividly feel a transparent tax, they’d hate it, and so they’d withdraw political support for it, driving down the value of the explicit transfer. Maybe, maybe not. Anyway, the argument that democratic transparency kills distributive justice makes liberals sad.

High rates of economic growth do a lot more for poor people than redistribution does. But probably the path to higher rates of growth has something to do with persuading welfare statists that they can do a lot more redistribution if there is more money to redistribute. Now, if you come to see growth as a means to the end of more generous redistribution, you might find that the knock-on effects of growth end up making a lot of that planned redistribution superfluous. The historical path to freedom had something to do with autocrats realizing they could skim more off the top if there was more to skim, but then found themselves undermined by the economic empowerment of their subjects. Maybe it’s something like that. Or maybe the flush welfare state will come up with new risks to insure, new stuff to give away, since it can afford it.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center