THE BLOG

Redistribution: The 'R' Word

12/11/2013 02:51 pm ET | Updated Feb 10, 2014

The President has announced that he wants to tackle inequality and the lack of upward mobility for poor Americans. He has many ideas for doing so, and many involve redistribution. But he smartly avoids mentioning the "R" word. Redistribution gets a bad rap, even though all policies redistribute. Even Democrats act all shame-faced when Republicans drop the "R" bomb on them.

This is probably because conservatives tell a stronger story: Redistribution unfairly punishes the rich, indulges the poor and undermines incentives for either to work very hard. "Class-warfare" creates expensive bureaucracies and fosters contempt for job-creators. Instead of an industrious, self-reliant, citizenry, progressive policy creates a culture of entitlement and dependence. To top it off, leftist complaints about "fairness" sound whiny, since even compassionate grownups know that life isn't fair.

But there is another side to the story. Well-designed redistribution makes society better off. This is because poverty is expensive. The poor usually stay that way, especially when inequality is high. And sustained poverty increases crime, which traumatizes victims and forces us all to pay for courts and prisons. Poor people routinely live shorter, unhappier, less economically productive lives than their middle-class counterparts. Their lives are much more likely marked by divorce, domestic abuse, dead end-jobs, obesity, chronic disease and early death. These sad situations sap the vitality of our families, communities and economy and drag us all down.

Redistribution also increases total wealth because highly concentrated money gives small groups too much influence over government and corporate policy. Special interests arrange subsidies and shape regulations so that they can avoid real economic competition. By insulating wealthy companies they undermine the creative destruction that makes markets work. This raises prices and stifles innovation.

Finally, cash is actually more valuable when used by the needy. Since people have to have at least a few dollars to survive, a dollar does more for the desperately poor. And basic goods like hygiene, shelter, health care and an education still offer much greater value per penny than mcmansions or Lexuses. People get healthier and happier and live longer when lifted from poverty. But at middle income levels, the benefits of increased wealth start to level off. This means we get the best overall bang for our buck when we put money in poor people's hands.

Other widely accepted principles like reciprocity also require redistribution. Our globalized economy disproportionately serves the wealthy. CEO pay has risen dramatically compared with employee pay in recent decades. This is not because executives are evil, nor because they all got smarter and harder working while all their employees stared blankly out the window. Economists tell us that the massive increase at the top in recent years was driven by our move to a globalized, winner-takes-all economy and certain technological advances. If CEO pay triples in 20 years and worker pay stays the same, this most likely means that a larger percentage of an executive's paychecks is driven by economic and political change. Reciprocity suggests that she should pay a larger percentage of her income forward.

Our political order also does far more for the rich than most people realize. Beside corporate subsidies and fat mortgage deductions, a great deal of government spending boosts elite wealth. This includes market-enabling regulation, a contract-enforcing judiciary, a crime-fighting police force, a border-defending military, a commerce-enabling infrastructure, a sea-lane protecting navy and a competitiveness-creating education system. All of these make our economy large enough for people at the top to leverage themselves and become extremely rich. Even the safety net stimulates consumer spending. A wealthy person benefits much more from this arrangement in real dollars than does a poor person. This may be inevitable, and is no reason to demonize the rich. But it is a good reason to compensate those who lose out in the economic and political arrangement.

Aid for the poor also brings our "equal opportunity" rhetoric closer to reality. Without redistribution, people stay stuck in their parents' economic class. In nations with weaker safety nets, the poor have a much harder time advancing. In fact, the US lags almost every other industrialized nation in intergenerational mobility. If the link between hard work and reward gets broken, then the cycle of poverty and all the nastiness that accompanies it will gain a firmer grip. If a large group of people is legally allowed to go to college, earn money and get good health care, and really tries but never manages to actually do any of those things, we might wonder whether these opportunities are real in any meaningful sense. Without some form of redistribution, true opportunity will remain out of reach for those at the bottom of the economic heap.

By and large, the poor have not "earned" their poverty. Much of our lot in life lies beyond our control. Our skills, temperament, birth year, racial group, country of origin, immigration status, upbringing, opportunities and the talents that our particular society rewards are to a large degree out of our hands. Why should people be punished and rewarded for accidents of birth? As John Rawls argued, if we had no idea what our background would be, but had to choose what kind of society we had to live in, we would surely choose a world with real equality of opportunity. Not equal pay for all -- that too makes it impossible to advance. Just real opportunity. Redistribution might be unfair in a neutral social, political, and economic universe where individuals start as a blank slate and from birth direct their destinies and earn their exact lot in life. But no such world exists. Justice requires real opportunity, and that requires political interventions.

Conservatives are right to worry about bad incentives. But redistributive policies can easily avoid this -- by making work pay, like with the earned income tax credit. President Clinton's welfare reform required recipients to look for work and this raised labor participation rates. Excellent early training for parents, childcare, and education gives people a helping hand without making unemployment pay.

Redistribution is not a socialist conspiracy to equalize everyone's outcomes and put most of the populace on the public dole. When well designed, it makes our society happier, healthier, wealthier and more just.