The Baldy Center Blog Post 41. 

Blog Author: Matthew Dimick, Professor, School of Law, University at Buffalo

Blog Title: Predistribution or Redistribution?

Keywords: Great Recession; Income Inequality; Predistribution; Redistribution; Law and Economics; Minimum Wage Laws; Collective Bargaining; Antitrust; Intellectual Property; Taxation, Partisan Realignment; Education and Politics.

You increasingly hear the distinction between “redistribution” and “predistribution.” Redistribution refers to changing, through taxes and transfers, the distribution of income after people have already engaged in labor and consumer market transactions. Predistribution, on the other hand, refers to using legal rules—minimum wage laws, collective bargaining legislation, antitrust, intellectual property—to shape the influence of market forces that produce income inequality in the first place.

According to the received wisdom, it is more efficient—comes with less loss of economic resources—to redistribute income rather than predistribute income. Interference in the market causes additional waste, on top of the economic losses that taxation already causes. For legal scholars, this argument was given a precise and elegant form in a famous 1994 article entitled “Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income,” written by two Harvard law professors and economists, Louis Kaplow and Steven Shavell. By narrowing the distribution of income, both predistribution and distribution distort work incentives and reduce the supply of labor. But predistribution also distorts behavior in the activity regulated by the legal rule. A minimum wage law, for example, also reduces the demand for labor by making employers pay higher wages. The minimum wage is also imprecise: society’s poorest may not have jobs at all, and sometimes minimum-wage workers aren’t poor, such as the teenager from a rich household working at McDonald’s for the summer.

The view that redistribution is more efficient than predistribution has been enormously influential. In a working paper recently published by the National Bureau of Economic Research, the political economists Ilyana Kuziemko, Nicolas Longuet-Marx, and Suresh Naidu show that since the 1970s, the Democratic Party’s socio-economic policies have evolved from predistribution to redistribution. This policy evolution also caused a significant partisan realignment by education. More-educated voters support redistribution, while less-educated voters support predistribution; as the Democratic Party changed its socio-economic policy objectives, it lost less-educated voters and gained more-educated voters. This policy shift may have been prompted by the Democratic Party’s courting of wealthier voters and donors. But the intellectual justification for the shift was precisely the economists’ belief that redistribution was more efficient than predistribution.

My book argues that there is a much greater scope for predistribution than Kaplow and Shavell and other economists, legal scholars, and policymakers realize. In the case of the minimum wage, for example, higher wages may increase workers’ productivity on the job, by giving them something worth working hard for: a better-paying job. This productivity effect may offset the economic costs of the minimum wage and, if those offsets are large enough, make the minimum wage more efficient than taxes at redistributing income.

One problem with the debate is that it had been conducted in overly abstract terms. For instance, Kaplow and Shavell use the example of predistribution through tort law. But outside of products liability, no one really thinks about tort law as a way to predistribute income. Rather, the examples of predistribution that readily come to mind are similar to those I listed previously: minimum wage statutes, collective bargaining legislation, housing quality standards, competition and antitrust law, and intellectual property law. My book argues that in each of those more concrete cases there are compelling reasons to think that predistribution might be more effective than redistribution.

Part of the reason for growing income inequality is a policy failure. By avoiding market intervention, on the idea that predistribution is less efficient than redistribution, we’ve abandoned one of our most important policy tools for combating inequality. By showing that legal rules can be redistributive just as or more effectively than taxation, we expand the ranges of options available for tackling inequality in today’s income-divided societies.

Related Links:

• Faculty profile
• Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income
• “Compensate the Losers?” Economic Policy and Partisan Realignment in the US