The state & inequality

Here are four things I've seen recently:

 - Political Scrapbook reminds us that a hedge fund run by George Osborne's best man made millions from the sell-off of Royal Mail.

 - Suzanne Moore says Camden council gave her £15,000 to leave a council flat in King's Cross that is now on the market for over £500,000; its price rise is no doubt partly due to the publicly-funded regeneration of the area.

 - Tom Streithorst writes: "Without more cops and their more aggressive policing, the average Manhattan apartment today would not be worth $1 million."

 - David Runciman says that Richard Branson "has made his fortune out of the regulated parts of the economy, which he has milked to extract government subsidies, tax breaks, licensing agreements and protected income streams."

These are all examples of how state actions help to enrich the well-off. There are, of course, many other examples. Bankers get a subsidy of billions (pdf) of pounds a year; QE made the rich better off; outsourcing hands millions of pounds of taxpayers money to firms of dubious efficiency and propriety; tax credits are, in part a subsidy for low-wage employers; housing benefit enriches landlords at least as much as tenants; welfare benefits generally help capitalists as well as the jobless; trade union power was broken in part because Thatcher used a state-owned industry, and state policies, to raise unemployment, to do so.

I could go on, but you get the picture. As Joe Stiglitz has said, inequality is "not the result of the laws of nature or the laws of economics. Rather, it is something that we create, by our policies."

One implication of all this is that it is just silly for libertarians to pretend that inequalities are fair. Many - perhaps most - of them arise from the sort of state interventions which consistent libertarians should deplore. When they claim that the inequalities arising from a free market are just, they are talking about a parallel universe of no relevance to the one we inhabit. And, in truth, smarter libertarians have always seen this. In Anarchy, State and Utopia Robert Nozick wrote:

There is no argument based upon the first two principles of justice, the principles of acquisition and transfer, for such a more extensive state [than the minimal one]...If, however, these principles are violated, the principle of rectification comes into play...One cannot use the analysis and theory presented here to condemn any particular scheme of transfer payments, unless it is clear that no considerations of rectification of injustice could apply to justify it. (p230-1, Nozick's emphasis)

However, I don't want to merely poke fun at the right. There's an embarrassment here for the left as well. If the state can be used to increase inequality - not least by selling assets cheaply or by using state policies to attack workers - why should egalitarians look to it as a solution rather than the problem?

* I write all this as a beneficiary of state-induced inequality; state education spending gave me my human capital, and easy money policies and planning restrictions gave me a near £500,000 tax-free gain on my London flat.

Comments

[Luis Enrique]

"Many - perhaps most - of [inequalities] arise from ... state interventions"

consider the gap in living standards between a cleaner, earning the minimum wage, receiving tax credits and housing benefits, state healthcare, education for children, and an investment banker rolling in money but paying a hefty tax bill. This is what "most inequalities" means to me, the gap between the rich few and the poor masses.

now I accept there might be better ways of going about redistribution (maybe council housing versus HB for example) but are you really making the claim that the size of the living standards gap between cleaner and banker is (mostly?) explained by state interventions?

It's not clear to me that identifying some countervailing mechanisms in state interventions is enough to justify the claim that inequalities "arise" from state intervention.

Suppose we start with a situation in which Tom has £100 and Dick has £1000. The state intervenes by raising taxes on Dick and introducing tax credits for Tom, which notionally make Tom £50 better off and Dick £50 worse off but actually partially allows Tom's employer (Dick) to pay lower wages and make more profits, so rather than Tom £150 and Dick £950 we end up at say Tom £125 and Dick £975.

So the net effect of state intervention is to reduce inequality, but there are still some mechanisms that helps the rich in a sense, in the mix. Does it make sense to look at this situation and claim "many inequalities arise from state intervention" because you think tax credits allow employers to cut wages?

I know I am going to sound like the sort of wanker economist that everybody deplores, but when it comes to things like QE and implicit subsidies from too big to fail, you really need to think about general equilibrium effects, otherwise you risk characterising QE as something that helped the rich when really it helped the poor (by, say, reducing unemployment relative to a non-QE world).

Of course I appreciate that a state that notionally redistributes income can also do things like create a billionaire by selling state assets to a chum for peanuts, and I am sure you are right that you can point at some rich individuals and say they're rich because: the state. But although I don't have any more data to back up this belief than you provide for yours, I'd be surprised if this sort of thing accounted for much of contemporary inequality, I'm still going to place the blame for most of that at the feet of the "free" market.

For example, top execs having wages set by committees staffed by fellow top execs all of whom go around saying we need to be paid this much because this is the going rate for top execs. I don't think you can call that the result of a "state intervention". I do think you can blame the state for failing to have come up with a policy to change this state of affairs. My guess is that's more what Stiglitz has in mind when he blames policy choices.

[Dave Timoney]

@Luis, the growth of executive looting followed the tax policy changes of the 1980s. In other words, lowering taxes on income, dividends and capital gains, while increasing taxes on consumption, sent a clear message to UK boardrooms: fill yer boots. This was a "state intervention" as much as the pit closures were.

Clearly not every inequality is the result of the state, but I think Chris's point is that ideology (and confirmation bias) blinds us to the reality that much more is the product of state intervention than we'd assume.

To answer Chris's question: egalitarians believe (and history proves) that the state can also drive greater equality. It is obviously a double-edged sword, but given the lack of leverage by organised labour, and given that non-financialised cooperation is going the way of the Co-op board, this may be the only viable tool available in the near-term. It's an imperfect world.

[Luke]

Luis, depends what counts as state intervention. How rich would your banker have got without limited liability for shareholders giving him equity capital to play with? Ditto Bill Gates without intellectual property laws. Peter Wood (Direct Line founder) without laws making motor insurance compulsory?

I accept that counting any law as "state interference" could rob the phrase of meaning, but I can't see how to distinguish "good/wise/minimum necessary law making" from state interference.

[Luis Enrique]

Fate

well ... maybe. If those tax cuts helped break down norms against self enrichment or something. But anyway, cutting taxes is not "the sort of state interventions which consistent libertarians should deplore"

Luke,

yep. I mean, as you acknowledge, if you go down that route then everything that happens everywhere is the state's fault because nothing would be like it is in the absence of property rights etc.

[Malle]

Given the size of the state it's very hard to ink of any entrepreneur who does not depend on the state and its socialism for the rich to some extent.

These examples are hardly embarrassing for the 'right', if by that you mean people who are libertarians. Surely it's support for the libertarian idea that state intervention almost inevitably leads to perverse outcomes.

Many libertarians will also be happy to acknowledge the need for state regulations to prevent state capture by interest groups, incl. the rich, and that the free market will soon become unfree if not tended carefully.

Instead these examples should be frustrating for the left, who despite their best efforts at building up the state for redistribution for equality get hijacked.

[breviosity]

"state education spending gave me my human capital"

Most of your human capital was inherited (see e.g. G. Clark, The Son Also Rises) not gifted by the state.

[Donald A. Coffin]

"state education spending gave me my human capital"

Or more accurately, maybe, allowed you the chance to acquire and develop your human capital. I assume your school years were spent actually, you know, learning things. (As I recall, mine were, but it's been a long, long time...)

[Donald A. Coffin]

breviosity--I think you are (at least partially) misreading Clark. His argument is that, in large part, inheritance practices *imposed and sanctioned by state action* have led to persistent inequality.

[Luke]

Luis, are you going to start a blog (if you haven't)? Go on.

[leslie48]

Surely the state is 'run' by the dominant group in power which is often the most economically privileged. New Labour did facilitate improvements be it minimum wages or child tax credits or expanding education from 3 yrs old to 23 yrs old ( universities are now contracting). Of course it is a complexity of the system that city tax revenues helped this.

So it is the Conservatives who led the state which sold off the Royal Mail cheaply after spending millions on top expert banker advice. And what a defense they made and how soft the media (i.e. BBC)let them off the hook for losing those many billions of tax payer's money. Naked bourgeoisie hegemony portraying the two Ed's as Muppet's for even questioning it.

[leslie48]

Surely the state is 'run' by the dominant group in power which is often the most economically privileged. New Labour did facilitate improvements be it minimum wages or child tax credits or expanding education from 3 yrs old to 23 yrs old ( universities are now contracting). Of course it is a complexity of the system that city tax revenues helped this.

So it is the Conservatives who led the state which sold off the Royal Mail cheaply after spending millions on top expert banker advice. And what a defense they made and how soft the media (i.e. BBC)let them off the hook for losing those many billions of tax payer's money. Naked bourgeoisie hegemony portraying the two Ed's as Muppet's for even questioning it.

[Blissex]

«the free market will soon become unfree if not tended carefully.»

That wording embodies the usual confusion between two very different concepts that conservative propaganda tries hard to confuse.

A *free* market is not necessarily a *competitive*, and most free markets become uncompetitive because different market participants have different leverage or market power, and/or increase their leverage by colluding, and there is ample evidence that many free markets are rigged.

The boons promised by conservative Economics for markets are not only exaggerated but also apply only to *competitive* markets, not to *free* markets.

But as a rule conservative policymakers hate competitive markets as much as they love free markets, because in free markets it is incumbents that have more leverage, and conservativism is all about the interests of incumbents.

To hide the confusion between free and competitive, the standard assumptions of conservative Economics models are that the "free" markets in the model are infinite markets with infinite vendors in each, there is no collusion among them, and that all buyers have the same demand schedule, so that under those assumptions "free" markets are also competitive.

[Metatone]

There's a non-sequitur at the end. Just because a shovel can be used to kill someone doesn't mean I shouldn't use it to build an irrigation canal that brings life...

[chris]

I'm not arguing that the state cannot sometimes (often) increase equality. My point is merely that it's a dangerous tool. To tweak Metatone's metaphor, if shovels had been used to kill millions of people around the world, we wouldn't want to manufacture them freely or leave them lying around where they could fall into the wrong hands.
I guess I'm agreeing with Hopi here (in a different context): "If you want to change a society, a single-term government is probably not the best way to do it"
http://hopisen.com/2014/why-transformational-politics-is-meaningless/

[Metatone]

The irony is that I agree, governments do what societies expect them to. If you want to change a society, you have to change the expectations in the society - and that's about culture, not politics. Indeed, my life's contribution to society is my work on how cultures change and can be changed.

Still, for what it's worth Chris, shovels have been used to kill millions of people around the world. A major weapon in WW1, WW2 and Rwanda, amongst other conflicts.

And let's not even begin to talk about knives…

And of course, states exist. It's not a question of "manufacturing them freely" it's much more about choosing how this tool gets used.

And that's the danger of people like Hopi Sen - they say "you can't change society for the better using government" while proposing policies to make society worse. Hopi's total, invincible ignorance about how systems work and his resulting insane proposals for reform drive me particularly up the wall.

[Socialism In One Bedroom]

Now I am from the school of 'we need to overthrow capitalism to see fundamental change' but...

Taking an example of a big state and big tax nation, Denmark. They have the lowest income inequality in the world and the highest minimum wage, they also have a large co-operative sector. Oh and they also top most UN standard of living tables.

This article shows the effect of government intervention:

http://en.wikipedia.org/wiki/Welfare%27s_effect_on_poverty

Doesn't this blow your ideas out of the water?