Predistribution: If it’s not harmful, it’s trivial

Inequality worries a lot of people. According to the British Social Attitudes Survey, nearly four out of five respondents think the gap between the top and the bottom is too large. 57% believe the government should do something to address the gap (a clear majority given that about a quarter abstain). Two out three believe inequality was a causal factor behind many social problems. Confidence in social mobility is very low, with three out of four rejecting the statement that there was similarity of opportunities. During a time of economic stagnation, these issues come more to the fore than under conditions of steady growth, but the concerns are not new. Some of the answers to the inequality-related questions have been broadly similar over many years, so this is not just about trendy banker-bashing, or the hype over a certain book named after an item in the DIY toolbox.

Judging from such surveys, one might expect that there is strong support for massive redistribution programmes – but there isn’t. Only one out of three respondents agrees that the government should redistribute more from the better-off to the less well off. Only one out of four agrees that the government should raise taxes to pay for higher welfare benefits.

Apart from that, the volume of redistribution is already very substantial. The figure below shows the difference between Gini coefficients before and after redistribution through taxes and transfers. In the UK, the Gini coefficient of market incomes (the darker bars) is higher than in most comparable countries. The difference is large given that Gini coefficients are mathematically bounded between 0 and 1, and that values below 0.2 or above 0.6 are practically impossible.

Graph: Gini-coefficients before (dark) and after redistribution (light)

Redistribution then lowers the Gini coefficient by 0.11 points – about the same as in Sweden, Norway, Denmark, the Netherlands and Germany. This means that the UK does not redistribute any less than the ‘Germanic’ countries – it just starts off with a more unequal distribution of market incomes.

Presumably, ‘predistribution’ is a response to these tensions. People want a more equal income distribution, but they don’t necessarily want further increases in redistribution, which has already been taken very far anyway. So is predistribution the way out? Is predistribution the way to narrow income differences without all the nasty side effects of redistribution?

It depends on what it means. If it means meddling with wages, industry structures and companies’ internal affairs, it is worse than redistribution. But there are a number of basic things which make good economic sense, while they would also decrease inequality. The are shown in the upper right corner of the table below, which, in a very simplified way, shows examples of factors that affect both inequality and overall economic performance.

Examples of factors influencing the income distribution by impact in economic performance

It will strike you immediately that the upper-right corner shows the kinds of issues where everybody agrees on the abstract goals, but nobody agrees on the actual policies required to achieve them.

And that is the real crux with predistribution. It is not yet clear whether the measures under this header fall into the upper-right or the bottom-right corner. If the latter, it means more red tape, dirigisme and wasteful subsidies. If the former, its proponents have only offered trivialities.

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

1 thought on “Predistribution: If it’s not harmful, it’s trivial”

  1. Posted 05/10/2012 at 11:25 | Permalink

    In view of the context – proposed by the Labour party – then I would have thought Predistribution will involve a hefty downoside – even on the upper right corner item – e.g., bad education policy focusing on the eradication of standards in the interests of equality.

    Re vocational training: I seem to recall Labour made great play about education when it came to power in 1997. So what exactly didn’t they during their terms in office whcih they will do now?

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