10

Redistribution Last

The overall substantive picture of the classical liberal view is still incomplete, because it has thus far omitted discussion of one central practice of the modern welfare state: redistribution of wealth to offset disadvantages from birth, ill fortune, or social position. Within the classical liberal framework, the case for redistribution, at least through voluntary transfers, rests on overtly welfarist grounds. It is widely (and correctly) assumed that individuals derive diminishing marginal utility from additional units of wealth. Some equalization of wealth therefore should, all else being equal, increase the overall levels of social utility from the same amount of wealth. That is why voluntary charitable work for the poor long preceded the advent of state welfare programs. Strong defenders of property rights and the rule of law should not therefore be indifferent to manifest imbalances of wealth. Historically, they never were. Before the clear separation of the state from the extended family,

redistribution was a powerful and persistent fact of life. Given the normal and predictable flucÂtuaÂtions in agricultural production alone, those individuals who earned enough to stay above the subsistence line in one period could easily fall below it in the next period.

In this context, redistribution to persons in need thus looks less like a one-shot transfer from A toÂB, and rather more like part of an informal but comprehensive insurance scheme. Confining redistribution to cases of “extreme want”1 shows the limited but vital role that such restrictions played in earlier centuries, when there was an equally pressing need to preserve incentives for productive labor. A farmer might be asked to leave his gleanings from the harvest for poor people to collect. Using a form of in-kind assistance had three powerful consequences. First, it tended to focus redistribution to high-return cases where survival was very much at issue, and away from cases where all persons had enough wealth to be above the starvation level. If individual survival requires 5 units of resources, redistribution of 2 units from someone who has 9 to someone with 3 matters. Even if one unit of wealth disappears in the transfer, at 6 units and 5 units, two people live instead of one. Conversely, shifting 200 units from someone who has 900 to someone who has 300 produces far less—if any—social gain, because both individuals survive whether or not these transfers are made. The ratios matter less than the totals. Second, any gleanings were limited in amount and were proportionate, roughly speaking, to the levels of production. Third, the recipient had to collect the gleanings, and could not rely on a cash payment that required no work. These de facto restrictions held down the level of redistribution to preserve incentives for production.

In addition, earlier soÂciÂeÂties developed a strong tradition of “imperfect obligations” to help the poor, either directly or through intermediaries. The “imperfect” nature of the obligation kept redistribution out of the legal system and put it in the hands of voluntary private orÂgaÂniÂza tions like churches, foundling homes, and hospitals, which in most cases could better monitor the recipients’ behavior than any detached public agency. Often, the aid was directed to persons with identifiable condi-

tions such as malnutrition, blindness, and deafness, which few individuals incur speÂcifiÂcally in order to receive some modest public aid. Using such systems as public hospital wards capÂitalized on these features to keep the welfare system small. These inelegant solutions were susceptible to insensitive application in individual cases. But they did make real inroads into the insistent probÂlem of human subsistence in times when the material resource base was far smaller than it is today.

In sum, there is surely a case for melding these elements into a comprehensive system, but not so as to overwhelm the productive features of voluntary exchange and public taxation. The best solution to the probÂlem of unequal wealth distribution is economic growth that reduces the size of the probÂlem by expanding the size of the pie. The banner that captures this program is “redistribution last,” which proposes a priority list of social reforms. First, remove the various obstacles that the system places in the path of voluntary improvement by way of excessive regulation or taxation. Once those probÂlems are solved, then attack the (fewer) pockets of poverty that remain. It is much easier to accomplish modest redistribution off a large wealth base than to engage in extensive redistribution off a small wealth base. No rule-ofÂ-law considerations demand this approach. But the most robust conception of the rule of law is fully consistent with it.

The role of redistribution beÂcomes inescapably broader under the modern administrative state. In this context, the combination of broad agency delegation and weak property rights leaves the amounts and objectives of redistribution at the mercy of poÂlitÂiÂcal pressures. No Âlonger is its object to use transfers that take advantage of the diminishing marginal utility of wealth by transferring resources from rich to poor. The careful efforts to limit redistribution to one sensible purpose are displaced by a plethora of dubious ends that work at cross-purposes with that one classical liberal theme. Everyone is now enÂtiÂtled to jump on the public bandwagon because of society’s ability to manufacture in the po litÂiÂcal arena all sorts of positive rights to jobs, health, education, and living wages. It is critical to note, however, that none of these positive

rights can have any of the three atÂtribÂutes that earlier were intimately connected with common-Âlaw rules of private property (see ChapterÂ5, above).

First, none of the systems can be universal. Now that mutual forbearance on invasion is not the end, individuals have to be broken up into classes; some of them are eligible to receive beneÂfits and others are required to give. Which persons fall into which classes always raises po litÂiÂcally contestable questions because of the endless number of positive rights that can claim support. The very individuals who are recipients under one version of the theory are payers under another version. The question of who receives is often separated from the question of who pays. One illustration of this was how Virginia funded its program for no-fault beneÂfits to newborns injured by human actions before or during childbirth: the funds were raised through taxes on laundromats and similar facilities. Trade wars, in their own way, have the same random connection. These arise precisely because governments are willing to limit the rights of disposition normally found in the bundle of domes- tic-Âand foreign-property rights, so that these questions are not just a matter of high-level negotiations between governments, unconnected with issues of private rights. Let American beef be excluded from some overseas nation, and we can exclude draperies or paper clips in exchange. The tight connections between the wrongdoer and the victim that are a feature of the corrective-justice view of tort law vanish when state power is thrown into the mix. In the end, the crazy-Âquilt pattern of net transfers could easily cancel out so that evÂeryÂone comes out a loser.

Second, none of these poÂlitÂiÂcal chits is scalable. Every time new people move in or out of the jurisdiction, the credits and debits are thrown out of alignment, so that someone has to determine eligibility, raise taxes, cut beneÂfits, or some combination of the above, with all the attendant uncertainties of the poÂlitÂiÂcal proÂcess. This point has become evident with the current economic malaise that has threatened the solvency of key states such as California, New York, and Illinois, which today CEOs rank in this order as the worst three states in the nation for

their receptivity to business.2 The usual pattern is to think of high taxes as a way to satisfy state obligations to those in-groups (think public union pensions) to whom the revenue is owed. But at the state level, at least, the exit rights matter, so that high-Âincome people can and will flee jurisdictions that make aggressive use of their taxing power, which is why these states constantly seek federal bailouts, which then allow irresponsible ongoing fiscal management.3 Therefore, change wealth levels and a constant readjustment is needed in order to balance accounts. The turmoil never occurs with the creation and protection of negative rights.

The efforts to provide universal health care often founder on just this insight. Here is one variation. This nation is too large to administer as a single whole, so that redistribution through government programs is tied to location. In a market system, the class of insureds does not matter for the calculation of the premium, which in all cases is equal to the expected cost of the coverage plus an allowance for the administrative load. But once there are built-Âin cross-subsidies within a given geographic region, the boundaries of the district matter because persons located in poor health districts pay far greater premiums than do those with the identical personal atÂtribÂutes who are located in low-Ârisk districts.4 At this point, a poÂlitÂiÂcal fight ensues to draw favorable boundaries, which dissipates wealth without creating any social improvement. Community rating plans that put men and women (who have different risks at different ages) and young and old in the same pool also create that system of cross-Âsubsidies, which results either in the withdrawal from the pool of low-Ârisk persons or forced mandates to keep them in. These are not small or technical probÂlems. They dog evÂery single effort to mandate insurance or welfare pools.

Third, the assignment of positive rights is not stable against changes in overall wealth. What works in one locale or area won’t work in another. Thus, constitutions that seek to mandate these positive rights are never able to make them “enforceable,” in the strong sense of that word. Instead, the constitutional right gets enforced as a judicial command to

the legislature, which in turn has to decide which rights are sustainable in which economic conditions. That proÂcess is not, however, a freeÂlunch, for the very act of decision invites poÂlitÂiÂcal intrigue that imposes high costs, often without clear knowledge as to whether the state- determined allocations generate a distributional gain that can offset the unambiguous social losses from a smaller pie.

All of these disadvantages are cumulative, but the system is often tolerated by the transparent ruse that the duties of payment fall on the state rather than on the individuals who are taxed or regulated to fund these obligations. The allocative losses from redistribution are usually ignored, often due to the implicit assumption that a dollar taken from one results in a dollar given to another. That assumption overlooks the decline in overall wealth attributable to factional struggles and administrative costs. Even harsher words should be directed to the perverse patterns of redistribution brought on, for example, by an endless array of corporate subsidies that provide government support to the fiÂnanÂcially fortunate, who should instead be encouraged to engage in pie-Âexpanding activities. Under modern schemes of government, poor-toÂ-Ârich redistribution is as likely as the opposite.

Nor are the patterns sustainable in the long haul, because of the endless pressure to push beneÂfits forward and to defer costs. By design, Social Security included in its first round of payments initial enrollees who had made no contribution to the program. The funding imbalances in the initial allocation got built into what can only be called a government-sponsored Ponzi scheme, whose unfunded obligations continued to grow unchecked notwithstanding the constant warnings of impending doom. Today’s only serious debate over Social Security, Medicare (with its new PartÂD on prescription drugs), and Medicaid is not whether they will become insolvent, but when that will happen, and what horrific dislocations will follow.

The situation has deteriorated to such an extent that in the 2010 Medicare Annual Report, the government’s own actuary, Richard S. Foster, disavowed the relatively rosy proÂjecÂtions made in the report, on

the ground that they did not take into account the fact that Congress would routinely restore the cuts in physician’s fees in order to prevent an immediate implosion of a system that was badly run and overwhelmed with too many rights chasing too few resources. Thus, Foster wrote, “the fiÂnanÂcial proÂjecÂtions shown in this report for Medicare do not represent a reasonable expectation for acÂtual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider serÂvices will not be viable).”5 The proÂjecÂtions became only more dire in 2011, when government actuaries again repeated their urgent warnings about the unsustainability of the Medicare program.6 More generally, programs of positive rights have no built-in bias toward sustainability. In passing, it is worth noting that the only portion of this system that has outperformed proÂjecÂtions is PartÂD, which also is the only portion of the program that relies on market incentives to control costs.

The United States—and for similar reasons, much of western Eu- rope—are now at a critical juncture: they are caught between two powerful social forces that are not easily reconciled. On the one hand, enormous pressures mount in bad times to expand the level of transfer payments to the less fortunate—and evÂeryÂone else. The current conversation centers on refundable tax credits, which are disguised welfare payments to individuals who have already been insulated from all obligations under the income tax. Yet on the other side, there are proposals now afoot, especially on labor and health issues, to shrink the national resource base by placing new burdens on voluntary exchange. The dominant views of the current democratic health care programs heavily subsidize health care consumption, impose onerous regulations to keep these subsidies from flowing to a wide range of health care providers, and tax and regulate evÂeryÂone, both within and outside the favored state exchanges used to administer the health care system.

No government, however, can be all things to all people. Simple

math indicates that any nation that tries to increase redistribution while reducing productivity is heading, at best, for a prolonged period of stagflation, and more likely for a crash of major proportions. There are, of course, sensible voices that counsel against these reckless programs. Political prudence, however, may not be sufÂfiÂcient to forestall the poÂlitÂiÂcal pressures that move so strongly in the opposite direction. This potential economic meltdown could never happen within a classical liberal framework that rests on the twin pillars of limited administrative discretion and strong property rights.

Against this background, the right attitude on redistribution is not to rule it out of bounds on first principles, when in fact there is considerable (but not unlimited) public support for these programs. Rather, the better approach is to adopt the philosophy of “redistribution last.”7 The overall strategy is as follows. First, make sure that the productive side of the economy is in good shape; it should work through open competition and vibrant markets to raise the level of overall wealth, including that acquired by the least fortunate in society. Once that base is preserved, the scope of redistributive policies can be accordingly reduced, given that a large resource base is coupled with a lower level of need. In this environment, the reduced burden allows voluntary contributions to pick up more of the slack, which further reduces the need for public funding. In stark contrast, the current enÂtiÂtleÂment cycle drives the relationship between production and redistribution in the wrong direction, stretching fewer resources to meet ever-larger poÂlitÂiÂcal demands. The feared—and most likely—result of this vicious circle is that the bubble that has burst in the real estate markets will burst elsewhere, due to enÂtiÂtleÂment programs that consume a disproportionate fraction of the national wealth. The price for our rejection of the rule of law and strong property rights is steep indeed.