This article appeared on Substack on June 19, 2023
A common view attributes economic inequality to the evils of markets—greed, corruption, family connections, luck, and so on—rather than to differences in economic productivity.
Some wealth is no doubt “ill-gotten,” or at least not directly related to one’s own contribution to the economic pie.
Yet many differences in economic success result from government interventions that create winners and losers, and in arbitrary or even perverse ways.
Government licenses to become a lawyer, doctor, hair braider, plumber, or other professional raise the income of those who obtain these licenses, regardless of whether more talented.
Zoning regulation protects the wealth of those lucky enough to have bought land before such restrictions existed.
Much regulation, of all kinds, imposes substantial fixed costs. Larger firms more easily absorb these, while small firms face a greater barrier to entry. Regulation also creates the opportunity for less principled businesses to game the system, implying honest firms lose out.
When governments build schools, roads, hospitals, office buildings, military equipment, and other infrastructure, they contract out with private firms. Ideally government chooses the most efficient firm, but in practice cronyism and corruption play substantial roles.
Restrictive immigration policies prevent people in poor countries from earning substantially higher wages.
Medicare reimbursement rules reward less scrupulous health care providers, who manipulate billing codes to maximize their revenues.
Taxpayer-funded universities transfer wealth to families with more college-bound children.
Government protections for unions raise member wages but cause others to be underemployed. Minimum wage laws have similar effects.
Rent controls discourage construction of new housing, raising costs for those who fail to secure controlled apartments.
The corporate income tax penalizes not just shareholders but customers and employees, who are often less well off.
Progressive or complicated tax codes create lucrative incomes for the lawyers and accountants who help individuals and businesses avoid or evade these features.
I could go on, but you get the point!
The fact that government causes these arbitrary redistributions is not, by itself, reason to avoid all intervention. If a policy generates large benefits, any resulting mal-distribution might be a necessary evil.
In a few cases, moreover, redistribution is the flip side of a potentially beneficial effect. Patents and copyright create monopoly profits that incentivize innovative or creative activity, perhaps benefitting society overall.
Nevertheless, policy evaluations should recognize the scope for arbitrary redistribution as one negative side effect of interfering with free markets.
Likewise, any discussion of redistribution should recognize that government, rather than the free market, is often the bigger offender.
