We should not be redistributing from people who prioritise income to those who do not

The satirical website the Daily Mash has revealed shock news: ‘Greedy people have more stuff, say experts’. They were reporting on an actual study at the University of California, which found that, to give two examples, people from higher socioeconomic status groups were more likely to withhold information in a negotiation in order to get better results, and when assigned tasks in a laboratory where a jar of candy, reserved for visiting children, was on hand, and ‘invited to take a candy or two’ they took more.

There are some obvious reasons to doubt that research. Tyler Cowen, an economist at George Mason University points out that: ‘Of the seven tests, two of them showed that people driving more expensive cars are more in a hurry and more likely to cut off others or not yield.’ Not great, but not the most awful behaviour either. ‘Several of the tests involved people being asked to imagine they were high class, not actual “high class” people themselves.’ And finally ‘it was also easy enough to “prime” the lower class individuals to feel the same way, suggesting that extreme context dependence will hold here.’

And socioeconomic status is a muddy concept. The really interesting differences are probably within socioeconomic groups. Before anyone gets on their high horse about unethical greedy capitalists for example, they might want to consider that a University of Toronto study found that buying ‘ethical’ or ‘green’ goods also made people behave less ethically.

There is a more profound implication of this study though, and other recent research looking at the link between priorities and income. Many proponents of high taxes and public spending argue that they are needed in order to redistribute income from those who are fortunate to those who are less fortunate. But is someone on a lower income necessarily less fortunate than someone on a higher income? What if they just want different things?

If someone wants to pursue a career in hemp weaving or abstract puppetry, instead of earning more money as a dentist or an actuary, it is presumably because they would enjoy it more. In general people who want to earn more tend to earn more. Nobel Laureaute Daniel Kahneman reports in his book Thinking, Fast and Slow that a large-scale study showed ‘striking evidence of the lifelong effects of the goals that young people set for themselves’ and ‘each additional point on the money-importance scale was associated with an increment of over $14,000 of job income in 1995 dollars!’

There is no good reason why we should be redistributing from people who prioritise income to those who don’t. It will make us worse off overall as those who value the money least will receive it. It would be unfair, for example, because a corporate lawyer doing the dismal work of looking over an interminable contract in the small hours of the morning wouldn’t be properly compensated for that horrible task. And, as people like that have other options, levelling out the differences in pay will likely result in an oversupply of expressive salsa dancers and an undersupply of actuaries.

Two economists at Harvard Business School, Benjamin Lockwood and Matthew Weinzierl, have looked at this issue and found that theoretically there should be less redistribution in a society when the extent people care about their income varies more, when there is greater preference heterogeneity. In empirical research, they then found out that it works out that way in practice: ‘In countries and states with more heterogeneous tastes for consumption relative to leisure, redistribution is statistically significantly lower.’

Of course there are other causes of inequality besides differences in our preferences. Gary Becker, another Nobel Laureate, and Kevin Murphy, his colleague at the University of Chicago, have written about how the increase in inequality in the United Statesrecently is largely a result of a ‘rise in the payoff to education and other skills’. As they say, that creates an incentive for people to invest in improving their own education and gaining new skills. It is much better to help them do that rather than redistributing income and eroding that incentive. The real problem is dysfunctional schools and social problems that leave too many people unable to respond to that incentive.

Inequality is the way the market tells people what the rest of us need. Some can’t act on that information and we should help them do so. Others choose not to. It is quite right that in a free society someone can decide they want to spend their life as a holistic rap therapist. We might even think that some of their work has some deeper value that philanthropists should support. But the tax and benefit system shouldn’t be eroding the incentives that focus our hard work and ingenuity on the needs and wants of others – and focus the efforts of ‘greedy’ people on our interests.

Matthew Sinclair is Director of The TaxPayers’ Alliance.

Matthew Sinclair is a senior consultant at Europe Economics.

3 thoughts on “We should not be redistributing from people who prioritise income to those who do not”

  1. Posted 02/03/2012 at 13:55 | Permalink

    I doubt it simply because it is from the epicentre of wacko junk science.

  2. Posted 02/03/2012 at 13:57 | Permalink

    L.P. Hartley’s dystopian novel ‘Facial Justice’ is highly recommended for egalitarians. It explores a policy of ‘uglifying’ handsome people; and reminds us that there are many aspects of ‘different-ness’. The great practical advantage of focussing on financial differences is that, to a large extent, they can be measured and the state can relatively easily confiscate people’s money. (Judging by recent penal retrospective legislation, the government doesn’t even have to legislate to authorise it do so.) There are several reasons why one person may be wealthier than another: he may be older and have accumulated more over his lifetime; he may have earned more during his working life; he may have saved a higher proportion of his earnings; he may have invested more successfully; and he may have inherited or been given more. It is not altogether easy to determine whether some of these reasons are more ‘meritorious’ than others. In any event, as Hayek pointed out, we don’t really want to reward merit but value created. There, as most experienced people recognise, luck is likely to be an important element.

  3. Posted 31/03/2012 at 16:45 | Permalink

    In fact rich people are making life cheaper to poor because buying more they make costs per unit lower. This is for instance with electricity, with gasoline and/or with any other goods and services.

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