Tuesday, November 20, 2007

Understanding Government: Redistribution

The most common form of government spending is redistribution. Redistribution is taking money from some people and giving it to others.

The name redistribution is somewhat misleading. It implies that wealth was "distributed" in the first place, and that someone decided that some would have more than others. "Distribution" can also refer to a statistical distribution that describes what people have. The fact of a given statistical distribution does not imply how it came about.


What are the consequences of redistribution?

Redistribution necessarily means taking money from some people. This is accomplished through taxation, which is based on the threat of force, or violence. Redistribution makes these people poorer by the amount that is taken from them.

Beyond this, redistribution creates incentives that affect people's actions. Taxing the creation of wealth discourages the production of wealth. Thus redistribution makes those who pay for it poorer yet again. This makes the whole society poorer, since any innovation, investment, or production that is no longer profitable cannot provide new and cheaper goods to the public.

Redistribution also creates incentives for those who receive money. Unless money is given to everyone, there must be some standard to determine who receives money and who does not. Redistribution encourages people to act in such a way as to meet that standard, and discourages them from acting in such a way as to not meet that standard.

For example, redistribution is often supported to alleviate some hardship, such as poverty. However, giving people money on the condition that they be poor means that people will be encouraged to be poor and discouraged from ceasing to be poor. Thus redistribution intended to alleviate poverty will actually increase poverty.

When money is given to people in a certain country, it encourages people to move to that country. Thus redistribution encourages immigration, whether legal or illegal.

There are usually alternative ways of achieving a goal. Encouraging one of them will discourage the others. Giving out money will discourage other ways of making money. The way that most people increase their wealth is to get a job and work hard, get an education, get married, spend less, save more, and use their money wisely. Thus redistribution intended to alleviate poverty encourages unemployment, underemployment, laziness, ignorance, divorce, and foolish and wasteful spending, and discourages production, education, marriage, saving, frugality, and prudence. Thus redistribution encourages harmful behaviors and discourages beneficial behaviors.

The prospect that removing the consequences of bad behavior or lack of good behavior will encourage bad behavior and discourage bad behavior is known as moral hazard.

Another type of redistribution seeks to aid victims of calamities such as natural disasters or medical emergencies. These calamities themselves may be unavoidable, but that does not mean that people's preparation for or reaction to them is unchangeable. The management of risk can be accomplished in the free market through insurance. Purchasing insurance can best alleviate the harm caused in a catastrophe.

Further, insurance companies encourage behaviors that reduce risk. Government payments to victims of calamities encourage risky behaviors. For example, aid to people whose houses have been destroyed by hurricanes encourages people to live in areas more prone to hurricanes and makes such disasters more likely.

Another alternative means of dealing with hardship and calamity is charity. Thus people freely give to those in need. Aside from the fact that it is voluntary, the difference between charity and redistribution is that when people give their own money, they are better able to insure that it goes to those who are truly in need, and does not create moral hazard.

Redistribution discourages charity, both because people have less money to give and because people have less reason to give when they believe that the government is already addressing a problem. Thus more effective charity is displaced by less effective government aid, further harming the poor and needy.

While redistribution is often accomplished through a combination of taxation and spending, it can also be accomplished purely through the tax code. Thus some people can be charged more than the value of the services they receive, while others are charged less than the value of the services they receive. In America, so-called "progressive taxes" include the income tax and estate (death) tax.


A simplistic analysis of redistribution in a democracy says that since there are more poor people than rich people, the poor will vote themselves government benefits at the expense of the rich. This is seen as good or bad depending on a person's politics. However, this analysis is based on a misunderstanding of the nature of democracy.

The fact that people have equal votes in a democracy does not mean that they have equal power. People's votes are based on information that comes from a small number of people. Accomplishing political goals requires organization, strategy, and hard work. The rich and the political class are disproportionately capable of these things, and so will have disproportionate political power.

If government is given a power, it may be used for other than its stated purpose. So it is with redistribution. If government has the power of redistribution, it cannot only take from the rich and give to the poor, but also take from the poor and give to the rich. Given the disproportionate political power of the rich, what reason do we have to think that this would not happen?

In fact, this is exactly what happens. Many programs redistribute from the relatively poor to the relatively rich. In America, these include corporate welfare, most government employment, Social Security, Medicare, college funding, art subsidies, farm subsidies, and foreign aid.

Similarly, many taxes are actually regressive, or fall more heavily on the disproportionately poor and less on the disproportionately rich. These include sales taxes, payroll taxes, corporate income taxes, income tax loopholes, monetary inflation, and cigarette taxes.

When there are many different redistribution programs, people are a part of many different groups, some of which are redistributed to, and some of which are redistributed from. Thus it is far from obvious whether someone actually gets more from redistribution than he pays in.

There are a few people such as government employees and those who live off welfare for whom we can say this. But this is not the same as saying that they benefit from redistribution. Redistribution is not a zero-sum game; it is actually a negative-sum game. This is due to the perverse incentives described above. Many of those who receive more than they pay could still do better in a system without redistribution. Thus very few people truly benefit from redistribution.


Redistribution programs are among the most popular government programs. They are also among the most destructive. What accounts for their popularity?

One reason is that people think they are getting more than they really are. Less visible methods of taxation tend to predominate, while more visible methods of spending tend to predominate. Thus the government can take money from someone, give some of it back to him, and make him think that he has come out ahead!

Another reason that redistribution is supported is egalitarian ideology. Many people want to help the poor and some also want to hurt the rich. But as shown above, redistribution hurts the poor rather than help them. And redistribution often goes to the rich, rather then from them.

Another powerful reason for the existence of redistribution programs is the desire of politicians to control people. Redistribution allows politicians to control people with their own money, because they can impose conditions that people must meet to receive money. Thus redistribution is a powerful tool of those who wish to impose their own agendas on society.

Many redistribution programs continue to exist even when few people support them. This is due the difference between concentrated and dispersed interests. When a small number of people benefit from a redistribution program, it is easier for them to organize support for it and more efficient to do so. In contrast, it is harder to organize opposition and more costly to do so.


The destructive consequences of redistribution described above take affect relatively quickly. But there another is another disastrous consequence that usually takes some time to appear.

Because of the dynamic of concentrated and dispersed interests described above, spending on redistribution programs will tend to increase and increase. People who forbear from receiving redistributed money must still pay the same amount in taxes. Thus they have an incentive to organize and create programs that redistribute money to them, or increase spending on such existing programs.

Politicians will tend to create entitlement programs, which promise guaranteed benefits far into the future. This will only accelerate out-of-control spending. The demand for spending on redistribution programs will outstrip people's ability to pay. Cutting spending will be politically dangerous, and directly raising taxes by the amount needed would be unpopular and unfeasible.

Most likely, they will borrow money. Redistribution practically guarantees that a huge government debt will be incurred. But government can only borrow money as long as people are willing to lend it. When the supply of lenders drys up, the most likely course of action will be massive monetary inflation, as the effects of printing more money can less readily be traced to politicians than spending cuts or direct tax increases.

But massive inflation robs people of the value of their money and guarantees massive price increases. This in turn leads to a painful economic collapse. This is exactly what happened in the Wiemar Republic in the 1930s and other countries at other times. This is an extraordinarily painful way to learn the lesson that you can't get something for nothing.

As Kipling put it in The Gods of the Copybook Headings,

In the Carboniferous Epoch
we were promised abundance for all,
By robbing selected Peter
to pay for collective Paul;
But, though we had plenty of money,
there was nothing our money could buy,
And the Gods of the Copybook Headings
said: "If you don't work you die."


Redistribution is an extraordinarily destructive type of government program. It depends on theft backed by government force. It discourages productive activity amongst both those from whom money is taken and to whom money is given. It encourages destructive personal behavior. It discourages private charity. It is often used by the rich at the expense of the poor. It empowers government and diminishes freedom. Finally, unless stopped, it will lead to bankruptcy and economic collapse. Thus government redistribution programs must be opposed.

1 comment:

Matthew said...

This post was great, Allan. Nice work.